Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 83536-YF
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF EUR145.3 MILLION (US$200 MILLION EQUIVALENT)
TO THE
REPUBLIC OF SERBIA
FOR A
DEPOSIT INSURANCE STRENGTHENING PROJECT
February 3, 2014
This document is being made publicly available prior to Board consideration. This does not
imply a presumed outcome. This document may be updated following Board consideration and
the updated document will be made publicly available in accordance with the Bank's Policy on
Access to Information.
﻿CURRENCY EQUIVALENTS
(Exchange Rate Effective December 31, 2013)
Currency Unit = RSD
RSD83.13 = US$1
US$1 = EURO.73
FISCAL YEAR
January 1 - December 31
ABBREVIATIONS AND ACRONYMS
DIA Deposit Insurance Agency
DIF Deposit Insurance Fund
DLIs Disbursement Linked Indicators
EBRD European Bank for Reconstruction and Development
EC European Commission
EU European Union
FSC Financial Stability Committee
IFRs Interim un-audited financial reports
IMF International Monetary Fund
IPF Investment Project Financing
MoF Ministry of Finance
MOU Memorandum of Understanding
NBS National Bank of Serbia
NPLs Non-performing loans
P&A Purchase and assumption
PDO Project development objective
PIE Project Implementing Entity
PIT Project Implementation Team
POM Project Operations Manual
RoS Republic of Serbia
TA Technical Assistance
TOR Terms of Reference
USAID United Stated Agency for International Development
WB World Bank
Regional Vice President: Laura Tuck
Country Director: Ellen Goldstein
Sector Director: Gerardo Corrochano
Sector Manager: Lalit Raina
Task Team Leader: Rinku Chandra
i
﻿REPUBLIC OF SERBIA
Deposit Insurance Strengthening Project
TABLE OF CONTENTS
I. STRATEGIC CONTEXT...............1........ .................1
A. Country Context ......................................................... 1
B. Sectoral and Institutional Context. ....................................... 1
II. PROJECT DEVELOPMENT OBJECTIVE ............4........ .........4
A. PDO........................................................ 4
B. Project Beneficiaries ..................................... ........ 4
C. PDO Level Results Indicators......................4.... ............4
III. PROJECT DESCRIPTION...............5............. ..............5
A. Project Components ..................................... ........ 5
B. Lessons Learned and Reflected in the Project Design. ......... ............. 8
IV. IMPLEMENTATION...............................................9
A. Institutional and Implementation Arrangements..........................9
B. Results Monitoring and Evaluation...................................9
C. Sustainability.................................................10
V. KEY RISKS AND MITIGATION MEASURES...........................10
A. Risk Ratings Summary Table .......................... ................10
B. Overall Risk Rating Explanation....................................10
VI. APPRAISAL SUMMARY..........................................11
A. Economic and Financial Analysis....................................1
B. Technical....................................................11
C. Financial Management...........................................13
D. Procurement..................................................15
E. Social and Environment (including Safeguards).........................15
Annex 1: Results Framework and Monitoring.................. .................16
Annex 2: Detailed Project Description........................................19
Annex 3: Implementation Arrangements......................................36
Annex 4: Operational Risk Assessment Framework (ORAF)........................45
Annex 5: Implementation Support Plan....................................... 48
.. . . . .. . . 1
﻿PAD DATA SHEET
Serbia
Deposit Insurance Strengthening Project (P1 46248)
PROJECT APPRAISAL DOCUMENT
EUROPE AND CENTRAL ASIA
Report No.: PAD896
Basic Information
Project ID EA Category Team Leader
P146248 C - Not Required Rinku Chandra
Lending Instrument Fragile and/or Capacity Constraints [ ]
Investment Project Financing Financial Intermediaries [ ]
Series of Projects [ ]
Project Implementation Start Date Project Implementation End Date
28-Feb-2014 30-Jun-2016
Expected Effectiveness Date Expected Closing Date
30-May-2014 30-Jun-2016
Joint IFC
No
Sector Manager Sector Director Country Director Regional Vice President
Lalit Raina Gerardo M. Corrochano Ellen A. Goldstein Laura Tuck
Borrower: Republic of Serbia
Responsible Agency: Deposit Insurance Agency (DIA)
Contact: Zoran Obradovic Title: Director
Telephone No.: 381112075100 Email: zoran.obradovic@aod.rs
Project Financing Data(in EUR Million)
[X] Loan [ ] Grant [ ] Guarantee
] Credit [ ] IDA Grant [ ] Other
Total Project Cost: 145.3 Total Bank Financing: 145.3
Financing Gap: 0.00
Financing Source Amount
Borrower 0.00
International Bank for Reconstruction and 145.3
Development
Total 145.3
111
﻿Expected Disbursements (in EUR Million)
Fiscal Year 2014 2015 2016
Annual 0.00 110.00 35.3
Cumulative 0.00 110.00 145.3
Proposed Development Objective(s)
The project development objective is to strengthen the financial and institutional capacity of the Deposit
Insurance Agency, so as to enable it to meet its deposit insurance and bank resolution obligations and
serve as a core part of financial sector safety net.
Components
Component Name Cost (EUR Millions) 1
Strengthen the financial capacity of the DIA 144.23
Strengthen the institutional capacity of the DIA 0.71
Institutional Data
Sector Board
Financial Systems Practice
Sectors / Climate Change
Sector (Maximum 5 and total % must equal 100)
Major Sector Sector %
Finance Banking 50
Public Administration, Law, and Public administration- Financial Sector 50
Justice
Total 100
ZI certify that there is no Adaptation and Mitigation Climate Change Co-benefits information
applicable to this project.
Themes
Theme (Maximum 5 and total % must equal 100)
Major theme Theme %
Financial and private sector development International financial standards and systems 100
Total 100
'Total of the two project components is less than the total amount of the loan (EUR 145.3) as the 0.25% front end
fee is being paid through the loan proceeds.
iv
﻿Compliance
Policy
Does the project depart from the CAS in content or in other significant Yes [ ] No [X]
respects?
Does the project require any waivers of Bank policies? Yes [ ] No [ X ]
Have these been approved by Bank management? Yes [ ] No [ X ]
Is approval for any policy waiver sought from the Board? Yes [ ] No [X]
Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]
Safeguard Policies Triggered by the Project Yes No
Environmental Assessment OP/BP 4.01 X
Natural Habitats OP/BP 4.04 X
Forests OP/BP 4.36 X
Pest Management OP 4.09 X
Physical Cultural Resources OP/BP 4.11 X
Indigenous Peoples OP/BP 4.10 X
Involuntary Resettlement OP/BP 4.12 X
Safety of Dams OP/BP 4.37 X
Projects on International Waterways OP/BP 7.50 X
Projects in Disputed Areas OP/BP 7.60 X
Legal Covenants
Name Recurrent Due Date Frequency
Para. 1, Section IA of Schedule 2 X Continuous
Description of Covenant
The Borrower shall maintain the Project Implementing Entity with the necessary resources to carry out
the Project, and with a composition and terms of reference satisfactory to the Bank.
Name Recurrent Due Date Frequency
Para. 2, Section IA of Schedule 2 X Continuous
Description of Covenant
The Borrower shall cause the Project Implementing Entity to maintain the Project Implementing Team at
all times during Project implementation with resources and responsibilities satisfactory to the World
Bank, including procurement and financial management, and with competent staff in adequate numbers.
V
﻿Name Recurrent Due Date Frequency
Para. 3, Section IA of Schedule 2 X Continuous
Description of Covenant
The Borrower shall cause the Project Implementing Entity to carry out the Project in accordance with the
Project Operations Manual, and shall not, and shall cause the Project Implementing Entity to not amend
or waive any provision thereto without the Bank's prior written approval. In case of any conflict between
the terms of the Project Operations Manual and the Agreement, the Agreement shall prevail.
Name Recurrent Due Date Frequency
Para. 4, Section IIB of Schedule 2 X Continuous
Description of Covenant
In the event that in any given calendar year the DIF Assets become less than the sum of Transfers to the
DIF made pursuant to this Agreement, the Borrower shall ensure that each audit report shall confirm that
the difference is justified by: payments in an equivalent amount made by the Project Implementing
Entity to fulfill its deposit insurance and bank resolution obligations, in accordance with the Borrower's
applicable laws and regulations, which payments shall not include repayment of funds borrowed for the
above purposes, from entities other than the Borrower; or (ii) an investment loss, when the investment of
DIF Assets was made in accordance with the Law on Deposit Insurance.
Conditions
Name Type
Subsidiary agreement (Article V, para 5.01 (a)) Effectiveness
Description of Condition
The Subsidiary Agreement has been executed on behalf of the Borrower and the Project Implementing
Entity.
Name Type
Project Operations Manual (Article V, para 5.01 (b)) Effectiveness
Description of Condition
The Project Operations Manual, satisfactory to the Bank, has been adopted by the Project Implementing
Entity.
Name Type
Additional Legal Matter Effectiveness
Description of Condition
Additional Legal Matter consists of the following: namely that the Subsidiary Agreement has been duly
authorized or ratified by the Borrower and the Project Implementing Entity and is legally binding upon
the Borrower and the Project Implementing Entity in accordance with its terms.
vi
﻿Team Composition
Bank Staff
Name Title Unit
Rinku Chandra Senior Financial Sector Development Specialist ECSF3
Aleksandar Crnomarkovic Senior Financial Management Specialist ECSO3
Kornel Drazilov Temporary ECCYU
Jose C. Janeiro Senior Finance Officer CTRLA
Aida Japarova Senior Program Assistant ECSPF
Ignacio Jauregui Counsel LEGLE
Alena Kantarovich Financial Analyst ECSF2
Jose M. Martinez Senior Procurement Specialist ECSO2
Tatiana Segal Senior Operations Officer ECSF1
Rajeev Kumar Swami Senior Financial Management Specialist ECSO3
Dusko Vasiljevic Private Sector Development Specialist ECSF3
Jasna Vukoje Program Assistant ECCYU
Non Bank Staff
Name Title
Rasih Engin Akcakoca Consultant, Bank Resolution
Gordon Wallace Johnson Consultant, Bankruptcy and Liquidation
Andrew Lovegrove Consultant, Bank Restructuring
Chris Parel Consultant, World Bank Operations
Leslie Kaye Sulenta Consultant, Deposit Insurance
David Keith Walker Consultant, Deposit Insurance
vii
﻿I. STRATEGIC CONTEXT
A. COUNTRY CONTEXT
1. Serbia continues to face major economic challenges following the global financial
crisis that began in 2008. The Serbian economy grew rapidly from 2000-2008, with output
rising in real terms by nearly 50 percent. With the onset of the global financial crisis, the
economy slipped into a recession, which led to a drop of real GDP by 3.5 percent in 2009. The
sluggish economic performance in the country since has led to a double-dip recession and GDP
growth was once again negative in 2012. GDP growth is estimated to have been 2.4 percent in
2013 and the economic outlook for the immediate future remains cautious at best, with the latest
projections for 2014 GDP growth at 1.0 percent.
2. The government has embarked on an ambitious program of fiscal consolidation and
structural reforms, including strengthening the financial sector, since early 2013. The crisis
unearthed key structural weaknesses and obstacles that hamper sustainable economic
development and have prompted the need for fiscal consolidation and the acceleration of the
unfinished transition to a market economy in Serbia. The government's mid-term reform
program aims to tackle many of these challenges and is outlined in the "Fiscal Strategy for 2014
with Projections for 2015 and 2016". It will focus on: (i) ensuring economic and financial
stability; (ii) preventing further debt accumulation; and (iii) creating an environment for
economic recovery and growth to foster employment and raise living standards.
3. The government has also demonstrated a strong commitment to the European
Union (EU) accession agenda, and as a result EU accession negotiations formally started on
January 21, 2014. EU membership remains a critical driver of policy and the government has
made a considerable effort in accelerating the preparation process for EU accession, including
engagement on critical issues such as justice sector reforms and rule of law. Popular support for
EU membership is also increasing, with a recent poll carried out by the Serbian Integration office
indicating that support for membership has increased by 10 percentage points in the past year.
B. SECTORAL AND INSTITUTIONAL CONTEXT
4. The financial sector in Serbia is dominated by the banking sector, which overall is
stable. The banking sector accounts for 90 percent of financial sector assets and around 80
percent of the country's GDP2. Serbian banks, as a whole, are well-capitalized, with capital ratios
that continue to exceed 20 percent. The ratio of bank capital to assets, which is a measure of
bank solvency and resiliency, shows the extent to which banks can deal with unexpected losses.
Serbian banks are also liquid, with core liquid assets/total assets also over 20 percent, and thus
well positioned to deal with any shocks.
5. However, there are some vulnerabilities in the Serbian financial system. Non-
performing loans (NPLs) in Serbia are among the highest in the region at about 20 percent.
Although they appear to be well provisioned, a deterioration in economic conditions could lead
2 All data in paragraphs 4 and 5 are as of the second quarter of 2013.
﻿to a further decrease in asset quality. In addition, three small banks in which the state had an
ownership stake (Agrobanka, RBV, and PBB) failed in 2012 and 2013 due primarily to
governance weaknesses that led to a significant deterioration in asset quality. These bank failures
have raised concerns about the asset quality in some of the remaining state-owned banks.
However, the state-owned banking sector is a relatively minor part of the financial system and
outside of two banks that have investments from the IFC and EBRD and are in the privatization
process, comprises less than 4 percent of total banking sector assets3. Finally, the recent bank
failures have resulted in the depletion of the Deposit Insurance Fund (DIF), which poses risks to
public confidence in the banking system and stability if there is another bank failure in the
future.
Box 1: Overview of the Serbian Deposit Insurance Agency and Deposit Insurance Fund
The Deposit Insurance Agency (DIA) in Serbia is a core part of the financial system safety net that deals
with problematic banks. The DIA, along with the National Bank of Serbia (NBS) and the Ministry of
Finance (MoF), are part of the safety net system that aims to limit the impact of problematic banks on the
financial system and the overall economy. The DIA's primary responsibilities include: 1) the resolution of
failed banks; 2) the reimbursement of insured depositors through the Deposit Insurance Fund; and 3) the
administration of bankruptcies and liquidations of banks in order to recover assets.
The DIF is mainly funded by collecting premiums from banks (currently 0.4 percent of insured deposits
on an annual basis). These are then deposited in the DIF account for legally permissible resolution
purposes as defined by the Deposit Insurance Law. In order to minimize the possibility of contagion,
deposit insurance covers depositors up to a certain insured amount (which in Serbia is EUTR50,000) in
case of bank failures. The DIA's role in the resolution of failed banks begins when the license has been
pulled by the NBS. The DIA has a "loss minimizer" mandate whereby the Agency is responsible for
developing a least-cost resolution strategy that aims to protect the funds of the DIF while at the same time
ensuring that insured depositors are protected. Under circumstances when DIF resources are insufficient
to fully meet resolution costs, budgetary funds are provided to the DIA to backstop any funding shortfalls.
In such cases, the "least cost resolution" principles are extended to the use of public funds. Tools
available to the DIA include direct payouts to insured deposits, a purchase and assumption transaction
with another bank in which the DIF provides financial support, and the establishment of a bridge bank to
allow for a more orderly resolution. In addition, the DIA also has responsibility for recovering assets from
bankrupt or liquidated banks in order to recover payouts that were provided.
6. As part of its efforts to minimize the risks that could emerge from these
vulnerabilities, the government has started work on preparing a strategy for the State-
Owned Banks. Representing the owner, the Ministry of Finance (MoF) has completed
extraordinary audits4 of all state-owned banks5 operating in Serbia. Based on the result of these
audits, the government has committed to developing a strategy to minimize the risks in the state-
owned banking sector and has earmarked funds in the 2014 budget to implement this strategy.
3 There are seven state-owned banks (with percent of banking assets in parentheses): Komercijalna (11.96%);
Postanska (3.03%); Cacanska (1.18%); Srpska (0.76%); Jumbes (0.42%); Jugobanka (0.04%); and Dunav banka
(0.25%). Komercijalna and Cacanska both have IFC and EBRD equity investments.
4 These audits have been conducted to review not only the financials, but also the asset quality and soundness of the
bank strategy.
5 Aside from Cacanska banka which is in the process of privatization.
2
﻿7. The government is also preparing a reform program related to the framework for
dealing with problematic banks. While Serbia has an extensive framework for dealing with
problematic banks, the failure of several banks in 2012 and 2013 led the government to begin
working on a reform program to improve this framework. The framework for dealing with
problem banks includes three government entities: i) the NBS; ii) the DIA; and iii) the MoF. The
NBS is responsible for bank supervision and all corrective actions prior to revoking the license
of a bank. Once the NBS has revoked the license of a bank, the DIA serves as the resolution
authority and determines the least-cost methodology for resolving a failed bank and ensures that
insured depositors do not suffer any losses. This can be done via a simple payout to the insured
depositors up to the coverage limit of EUR50,000, or through other mechanisms that are less
costly such as selling the bank through a purchase and assumption transaction. In addition,
separate mechanisms exist for dealing with systemically important banks, including the
possibility of receivership and the option of setting up a bridge bank. The MoF also plays a role
in the process for dealing with problematic banks and primarily protects citizens from the cost of
bank failures when the cost exceeds the funds available in the DIF.
8. The government has put in place a task force to develop specific proposals to
improve the framework for dealing with problematic banks. This includes representatives
from the MoF, the NBS, and the DIA, and is being supported by the World Bank, the IMF,
USAID, and the EC. Each of the external stakeholders has agreed to a specific technical and
financing role, including:
1. Financing the Deposit Insurance Fund and strengthening the institutional capacity of the
Deposit Insurance Agency: The government has requested a World Bank loan to
strengthen the financial and institutional capacity of the Deposit Insurance Agency.
2. Improving early intervention, particularly for state-owned banks: The World Bank
(through this operation and technical assistance) is supporting the government's efforts to
improve its oversight of state-owned banks.
3. Improving NBS supervision and enforcement: The IMF conducted a technical assistance
mission in early September 2013 to review NBS supervision and enforcement.
In addition, the EC and USAID are providing assistance on drafting any legal changes that are
needed to implement the overall reform program.
Role of the World Bank Financed Deposit Insurance Strengthening Project in the Government's
Reform Program
9. The recapitalization of the DIF is necessary as the recent Bank resolutions have
depleted the financial resources available in the DIF. The resolution of Agrobanka, RBV and
PBB has resulted in the DIF paying out the full amount of the assets that it had available
(EUR211 million in mid-2012)6. The depletion of the DIF creates risks to the Serbian financial
system. These risks stem from the possibility of not having adequate resources to cover insured
depositors at the time of a bank failure. Bank failures, even of a small size bank, have the
6 The funds available in the Deposit Insurance Fund were depleted by the resolution of Agrobanka, with the
government providing the additional financial resources necessary beyond what was available in the DIF. The
government provided the financial resources necessary for the resolution of RBV and PBB as the DIF was insolvent
at the time.
3
﻿potential to shake confidence in the entire banking system if depositors lose confidence that their
deposits are secure.
10. The failure of three small state-owned banks since 2012 has not caused depositors to
lose confidence in the banking system, in part due to the actions of the Deposit Insurance
Agency. The actions taken by the Deposit Insurance Agency, the NBS, and the MoF ensured that
the failures did not result in a larger crisis of confidence in the banking system. As a result, there
were no signs of deposit withdrawals or other indicators of deteriorating depositor confidence
after the resolution of the three banks.
11. This document presents a Results Based Investment Project Financing (IPF) to the
Republic of Serbia for an amount of EUR145.3 million to support the strengthening of the
Deposit Insurance Agency. Considering the importance of an effective Deposit Insurance
Scheme to maintaining confidence in the banking system, this operation aims to strengthen the
financial and institutional capacity of the Deposit Insurance Agency, so as to enable it to meet its
deposit insurance and bank resolution obligations and serve as a core part of the financial safety
net.
II. PROJECT DEVELOPMENT OBJECTIVE
A. PDO
12. The Project Development Objective is to strengthen the financial and institutional
capacity of the Deposit Insurance Agency, so as to enable it to meet its deposit insurance
and bank resolution obligations and serve as a core part of financial sector safety net.
B. PROJECT BENEFICIARIES
13. The project will strengthen confidence in the financial system. Deposit Insurance
Schemes are a core part of the financial safety net that aims to improve confidence in the
financial system. This can lead to an increase in the amount of domestic savings that can be
mobilized for more productive uses, which, in turn, can lead to increased growth and job
creation. Banks that operate in Serbia will also benefit from the ability of the Deposit Insurance
Agency to meet its deposit insurance and resolution obligations, as it minimizes the chances of a
small banking failure from becoming a system-wide issue that would negatively impact the
operations of all banks.
14. Households and small and medium enterprises that have deposits in the banking
system will benefit from the project. The Deposit Insurance Fund protects depositors up to an
insured limit of EUR50,000. Strengthening the Deposit Insurance Agency and financing the DIF
will ensure that these banking customers are protected in the case of a bank failure.
C. PDO LEVEL RESULTS INDICATORS
15. The PDO will be assessed based on:
(i) cumulative inflows into the Deposit Insurance Fund equivalent to 2.5 percent
insured deposits;
4
﻿(ii) the DIA performing its legally-mandated technical functions in any future bank
failures in which DIF resources are utilized.
16. These PDO level results indicators correspond to a series of disbursement linked
indicators (DLIs) that will be utilized to achieve these results. Annex 2 (Table 9) presents the
DLIs and the targets for disbursement.
III. PROJECT DESCRIPTION
A. PROJECT COMPONENTS
17. The Project Development Objective will be accomplished through:
a. financing the DIF with sufficient resources (from external creditors, government
budget, bank premiums, recoveries, and investments) to allow the Deposit
Insurance Agency to meet its deposit insurance and bank resolution obligations and
serve as a core part of financial sector safety net.
b. ensuring that the Deposit Insurance Agency has the institutional capacity to manage
the financial resources it has available.
18. Considering the importance of not only financing the DIF, but also strengthening
the Deposit Insurance Agency, the majority of the project consists of a results-based
component that finances the DIF based on the achievement of Disbursement Linked
Indicators (DLIs). This is complemented by a technical assistance component that provides
assistance in achieving the DLIs and strengthens the institutional capacity of the DIA. Thus the
project has two Components that aim to accomplish the Project Development Objective:
1) A results based component of EUR144.23 million that strengthens the financial capacity
of the DIA based on satisfactorily achieving DLIs that improve the ability of the DIA to
meet its deposit insurance and bank resolution obligations.
2) A technical assistance component of EURO.71 million that aims to strengthen the
institutional capacity of the DIA to meet its deposit insurance and bank resolution
obligations and achieve the DLIs.
Component 1: Strenathen the financial capacity of the DIA (EUR144.23 million)
19. This Component aims to finance the DIF with EUR144.23 million in 2014 and 2015.
The eligible expenditure in this component is the financing of the DIF. Pursuant to OP/BP 10.00,
such expenditure meets the productive use requirements as financing for a Deposit Insurance
Scheme helps increase confidence in the financial system. This, in turn, is likely to lead to
increased deposits in the banking sector, which can be utilized for more productive uses. The
Bank has financed Deposit Insurance Schemes through IPF instruments in the past and the
eligibility under OP/BP 10.00 has already been established.
7 The sources of funding are defined in the Deposit Insurance Law
5
﻿20. The World Bank financing will be disbursed based on evidence of the financing of
the DIF and achievement of six Disbursement Linked Indicators that aim to achieve the
PDO by:
a. financing the DIF with sufficient resources (from external creditors, government budget,
bank premiums, recoveries, and investments) to allow the Deposit Insurance Agency to
meet its deposit insurance and bank resolution obligations and serve as a core part of
financial sector safety net..
* DLI #1 - Premiums: Increase premiums charged to banks to increase the flow of
funds to the DIF.
* DLI #2 - Back-up funding: Ensure that the government puts in place a stand-by
facility that the DIF can access.
b. ensuring that the Deposit Insurance Agency has the institutional capacity to manage the
financial resources it has available.
* DLI #3 - Governance: Improve the independence of the governance bodies of the
DIA.
* DLI #4 - Information sharing between financial safety net providers: Ensure that the
DIA has the appropriate information to fulfill its mandate.
* DLI #5 - Recoveries: Improve the performance of the DIA's mandate to recover
assets from bankrupt and liquidated banks.
* DLI#6 - Early detection and timely intervention: Improve the information base on
state-owned banks to ensure early detection and timely intervention.
21. As outlined above in paragraph 20, two DLIs will be utilized to accomplish the
objective of sufficiently financing the DIF. The DIF must be restored to a level that provides
credible protection against future bank failures in the near term utilizing the sources of funds
outlined in the law. Based on analysis conducted (see annex 2 for more details), a target level of
DIF funding of 2.5 percent of insured deposits is needed in the short-term. For example, at 2.5
percent of insured deposits, the target fund would be approximately sufficient to cover the
cumulative insured deposit amount of the 10 smallest (out of a total of 30) banks in Serbia or the
total insured deposits of the 1 1th largest bank.
22. The first DLI will put in place an extraordinary premium of 0.2 percent of insured
deposits per annum in 2014 and 2015. This combined with the financing for the DIF provided
as part of Component 1 in the amount of EUR144.23 million will achieve the target level of 2.5
percent of total insured deposits by early 20168. The premium increase will result in a 50 percent
increase in the fee income from the EUR46 million collected in 2013 and result in approximately
EUR69 million in fee income in 2014. Based on an expected growth of insured deposits in 2015,
fee income is likely to be slightly above EUR72 million in 2015.
8 Assuming that there are no additional outflows from the DIF or significant increases in the amount of insured
deposits in the banking system.
6
﻿23. The second DLI will ensure that the DIA has access to a guarantee or stand-by
facility that it can readily access in case it runs out of funds. Best practice for Deposit
Insurance Schemes includes having a back-up facility that ensures that funds can be accessed
without parliamentary approval during a time of banking instability. Thus the second DLI
ensures that the government puts in place a guarantee or stand-by facility of at least EUR200
million in 2014 and EUR50 million in 2015 (the decrease is due to the increase in financial
inflows into the DIF during 2014).
24. As outlined in paragraph 20, four DLIs will be utilized to accomplish the objective
of ensuring that the DIA is able to manage the financial resources in the DIF. The DLIs aim
to: 1) improve the governance of the DIA; 2) improve the information sharing between the NBS
and the DIA; 3) strengthen the results from the recovery process; and 4) improve early detection
and timely intervention (particularly for the state-owned banking sector).
25. In order to increase the independence of Managing Board of the DIA, the third DLI
will aim to introduce a majority of independent board members. This will be accomplished
by changing the composition of the Managing Board and introducing at least one independent
Board member in 2014 and a total of three independent Board members in 2015 (while at the
same time reducing the number of Board members representing the authorities to two, one
appointed by the MoF and one by the NBS).
26. In order to strengthen the coordination between the financial safety net providers,
the fourth DLI will target the sharing of key data between the NBS and the DIA that are
necessary for the DIA to meet its mandate. Specifically, the DLI will ensure that the following
information is shared between the NBS and the DIA: i) the risk profile of all problematic banks
in Serbia as computed by the NBS; (ii) conclusions of supervision reports for banks which are
considered problematic; and (iii) details on all enforcement actions and compliance related to
problematic banks. In addition, the DLI will put in place a regular Financial Stability Committee
that will involve quarterly meetings that include the Minister of Finance, the Governor of the
NBS and the Director of the Deposit Insurance Agency9 to discuss problematic banks in detail.
27. The Deposit Insurance Agency's mandate also includes collecting receivables from
bank bankruptcies and liquidations. There are currently 18 banks in bankruptcy (most from
the early 2000's) that are being managed by the DIA. The fifth DLI will support the
improvement in the rate of recovery during the next two years.
28. The three recent bank failures demonstrated the need to ensure the appropriate
level of early detection and timely intervention to minimize the potential cost of any bank
failures. Although this applies to all banks that operate in Serbia, considering that the three
recent failures were banks in which the state had an ownership stake, the sixth DLI will target
improving the quality of information that the DIA and the government, as the owner, receives on
the remaining banks in which the state has an ownership stake. This will ensure early detection
and timely intervention if any problems do exist.
' There are other members of the Committee including additional members from the NBS, MoF and Securities
Exchange.
7
﻿Component 2: Strengthen the institutional capacity of the DIA (EURO. 71 million)
29. This Component will finance technical assistance (TA) in critical areas that are
needed to achieve the DLIs (Component 2a). Technical assistance will include:
* Governance: A senior international expert will be hired to advise the Managing Board and
management of the DIA.
* Information sharing between safety net providers: Consulting services will be provided to
ensure that the DIA has the adequate technical capacity and staffing to utilize the
information that it is provided by the NBS.
* Recoveries: Consulting services will be provided to improve the recoveries process.
* Oversight of state-owned banks: Consulting services will be provided to increase the
capacity of the MoF to oversee the state-owned banks.
30. This Component will also finance TA to support the DIA in performing its functions
related to acting as the Project Implementing Entity (Component 2b). This will finance the
monitoring and evaluation functions related to the DLIs, as well as other critical functions to
strengthen the project implementing entity related to financial management and procurement.
Project Financing
31. As mentioned earlier, the project has two Components of EUR144.23 million and
EURO.71 million. Details of the project cost and financing are provided in the table below.
IBRD financing is not subject to government tax.
Project Cost and Financing
IBRD or IDA
Project Components Project cost (EUR) Inci (r % Financing
Financing (EUR)
1. Strengthen the financial 144.23 million 144.23 million 100%
capacity of the DIA
2. Strengthen the institutional 0.71 million 0.71 million 100%
capacity of the DIA
Total Project Costs 144.94 million 144.94 million 100%
Front-End Feeslo 0.36 million 0.36 million
Total Financing Required 145.30 million 145.30 million 100%
B. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN
32. Past financial sector operations in Serbia have helped put in place a strong legal
framework, but at this stage in the development of the financial sector, sustained
implementation is crucial. Previous financial sector lending operations in Serbia have primarily
been DPLs, which have focused on developing a robust legal and institutional framework. This
included the 2011 Serbia Policy Based Guarantee that supported several reforms related to the
10 The exact amount is 0.25% of 145.3 million, which to the nearest Euro is 363,250. The exact amount of
component 1 is EUR 144,230,000 and component 2 is EUR 706,750.
8
﻿DIA. In addition, the World Bank has supported a number of technical assistance projects related
to the Deposit Insurance Agency, including a note prepared as part of the 2009 FSAP. One of the
important lessons from previous engagements is that a good legal framework is a prerequisite for
a stable and functional financial system, but that appropriate implementation is equally
important. With this in mind, and considering that a solid legal and policy framework is already
in place, the focus of this operation is on sustained implementation and institutional
performance. A Results-Based IPF is considered to be the optimal instrument to achieve this
goal, as by design it focuses more on achieving and sustaining actual results rather than policy
changes.
33. The World Bank has had success in financing Deposit Insurance Schemes". These
have shown that strengthening the financial and technical capacity of Deposit Insurance Schemes
can successfully help increase depositor confidence and assist in institution building of a critical
part of the financial safety net. Past projects have also shown that it is critical to include technical
assistance as part of the overall design of the project. Based on this experience, a technical
assistance component has been included in this project.
IV. IMPLEMENTATION
A. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS
34. The DIA will serve as the Project Implementing Entity (PIE) for both Components 1
and 2. The institutional and implementation arrangements are relatively straight forward, as
Component I has relatively few disbursements against a relatively small number of DLIs, and
Component 2 involves a small number of consulting contracts. In order to facilitate the project, a
Project Implementation Team (PIT) has been established in the DIA. The principal PIT activities
will comprise: (i) verifying DLIs achievement for purposes of disbursement; (ii) reporting on the
Bank advances that result in the financing of the DIF; (iii) managing TA procurement; and (iv)
liaising with and reporting to the government and with the World Bank on project progress. The
PIT that has been established includes the same staff that implemented the World Bank's
Pensions Administration project that closed in 2012.
35. The Borrower shall, at all times, ensure that, the Project Implementing Entity
maintains governance arrangements and a financial management system adequate to reflect the
operations, resources and expenditures of the PIT, acceptable to the Bank.
B. RESULTS MONITORING AND EVALUATION
36. Annex 1 lists the main outcome indicators for the project and the principal results,
and Annex 2 (Table 9) lists the DLIs. These will serve as the basis for results monitoring and
evaluation. The DIA will be responsible for collecting the data required for monitoring and
evaluation and for verification of the DLIs based on protocols outlined in Annex 3 (Table 10).
" Ash Demirgti-Kunt, Edward J. Kane and Luc Laeven: "Deposit Insurance around the World: Issues of Design
and Implementation", The MIT Press, 2008
9
﻿Indicators will be measured against agreed targets and compared to defined baselines. Project
progress reports will be prepared by the DIA on a semi-annual basis.
C. SUSTAINABILITY
37. The sustainability of the DIA will be strengthened through the design of the project.
The project was designed as a Results-Based IPF in order to improve the sustainability of the
DIA. The project not only finances the DIF, but also strengthens the institutional capacity of the
DIA through the achievement of the DLIs and the technical assistance component.
V. KEY RISKS AND MITIGATION MEASURES
A. RISK RATINGS SUMMARY TABLE
Risk Category Rating
Stakeholder Risk Moderate
Implementing Agency Risk
- Capacity Low
- Governance Moderate
Project Risk
- Design Low
- Social and Environmental Low
- Program and Donor Substantial
- Delivery Monitoring and Sustainability Low
- Sector Risk Substantial
Overall Implementation Risk Substantial
B. OVERALL RISK RATING EXPLANATION
38. The overall implementation risk is considered substantial. The major risks relate to
the current fiscal situation in Serbia and potential vulnerabilities in small pockets of the financial
sector. In addition, although there is a comprehensive fiscal reform program that is being
planned, there are risks related to this reform program losing momentum due primarily to
possible political uncertainty. The World Bank lending operation is also part of an overall
government financial sector reform program and the sustainability of the project partially
depends on the successful implementation of the overall reform program.
39. However, the risks related to the design of the project, the delivery monitoring and
risks related to the implementing agency are low. The achievement of the PDO is dependent
on DLIs being met. Considering that disbursements are contingent on achieving the DLIs (and
thus the PDO), the design of the project is considered to be low risk. In addition, the technical
assistance being provided in Component 2 further decreases the risk that the DLIs (and thus the
10
﻿PDO) are not met. The delivery monitoring risk is also low as there are a small number of DLIs
that will need to be monitored and the monitoring is being done by the same agency that is
responsible for achievement of the majority of the DLIs. The DIA, as the project implementing
entity, also has experience with World Bank lending operations that span almost a decade and
has the capacity and the experience to implement the project.
40. As an additional safeguard to mitigate project risks, the loan agreement allows for the
project to be suspended if the legislation related to the DIA and DIF has been amended,
suspended, abrogated, repealed or waived so as to affect materially and adversely the DIA's
ability to perform any of its obligations under the project agreement and carry out its deposit
insurance and bank resolution obligations. In addition, the required project audits will be
extended to include verification of the DLIs and also verify that any of the World Bank financing
of the DIF that is utilized only for deposit insurance and bank resolution functions.
VI. APPRAISAL SUMMARY
A. ECONOMIC AND FINANCIAL ANALYSIS
41. The nature of the proposed investment that is being financed in this project does not
lend itself to traditional economic and financial analysis approaches. However, there is a
significant amount of evidence that supports the development impact and public sector
provisioning in developing the financial and technical capacity of a deposit insurance scheme.
42. Effective deposit insurance can help prevent bank failures from turning into a full
blown banking crisis, which can be extremely costly. According to Laeven and Valencia
(2012)12, the median impact of a banking crisis in emerging economies has been an output loss
of 26 percent of GDP and an increase in public debt of 9 percent of GDP.
43. By reducing the fears about the safety of banks that can cause bank runs, deposit
insurance makes the banking system more stable so that banks can safely lend more of
their deposits. According to Demirgii9-Kunt, Kane and Laeven (2008)13 properly designed and
credible deposit insurance systems can enhance financial stability by making depositor runs less
likely. It can also lower the risk premiums that consumers pay for bank loans and lead to lower
interest rates for household financing.
B. TECHNICAL
44. The design of the project utilized an evaluation of the Serbian Deposit Insurance
System based on the Core Principles of Effective Deposit Insurance. The Core Principles of
Deposit Insurance were adopted by the International Association of Deposit Insurers (IADI) and
Basel Committee on Banking Supervision in 2010 and encompass 18 principles that are critical
for an effective Deposit Insurance Scheme. The evaluation during the preparation of the project
revealed that the Serbian Deposit Insurance System was compliant with most of the principles,
12 Luc Laeven, Fabiin Valencia: "Systemic Banking Crises Database: An Update", IMF Working Paper 12/163
13 Ash Demirgti-Kunt, Edward J. Kane and Luc Laeven: "Deposit Insurance around the World: Issues of Design
and Implementation", The MIT Press, 2008
11
﻿but that there were five areas in which the Deposit Insurance System is not compliant. These five
areas could be strengthened as outlined below, along with how the evaluation influenced the
design of the project:
1. Funding principle: "A deposit insurance system should have available all funding
mechanisms necessary to ensure the prompt reimbursement of depositors' claims including a
means of obtaining supplementary back-up funding for liquidity purposes when required.
Primary responsibility for paying the cost of deposit insurance should be borne by banks
since they and their clients directly benefit from having an effective deposit insurance
system."
o Evaluation of the Serbian Deposit Insurance System: The Serbian DIF is currently
insolvent and thus is not compliant with this principle. In addition, supplementary back-up
funding is not available.
o Impact on the Design of the Project: In addition to the financing being provided by
Component 1, one of the DLIs focuses on ensuring that the banks themselves bear primary
responsibility for recapitalizing the DIF (by increasing premiums temporarily). A second
DLI puts in place a back-up funding for the DIF.
2. Governance principle: "The deposit insurer should be operationally independent, transparent,
accountable, and insulated from undue political and industry influence."
o Evaluation of the Serbian Deposit Insurance System: The Serbian DIA's Managing Board
primarily consists of representatives of the government (the Minister of Finance, the
Minister of Economy, and representatives of the NBS). This potentially limits the
independence of the DIA.
o Impact on the Design of the Project: One of the DLIs in Component I changes the
composition of the Managing Board of the DIA to improve its independence. In addition,
technical assistance is provided in Component 2 for an advisor to the Managing Board to
ensure that the new Board has the capacity to fulfill its mandate.
3. Relationships with other safety-net participant's principle: "A framework should be in place
for the close coordination and information sharing, on a routine basis as well as in relation to
particular banks, among the deposit insurer and other financial system safety-net participants.
Such information should be accurate and timely (subject to confidentiality when required).
Information-sharing and coordination arrangements should be formalized."
o Evaluation of the Serbian Deposit Insurance System: A Memorandum of Understanding
(MOU) is currently in place that outlines the information that is shared between the NBS
and the DIA. However, the MOU is not fully sufficient and does not ensure that the proper
information is shared with the DIA on a timely basis.
o Impact on the Design of the Project: One of the DLIs in Component 1 improves the
information that is shared with the DIA by the NBS to ensure that it has sufficient
information on problematic banks to meet its mandate. In addition, technical assistance as
part of Component 2 ensures that the DIA has the capacity to utilize the information
properly.
4. Recoveries principle: "The deposit insurer should share in the proceeds of recoveries from
the estate of the failed bank. The management of the assets of the failed bank and the
recovery process (by the deposit insurer or other party carrying out this role) should be
guided by commercial considerations and their economic merits."
12
﻿o Evaluation of the Serbian Deposit Insurance System: The Serbian DIA does currently
share in the proceeds of the recoveries from failed banks in which it provides funding.
However, the current framework does not produce results that are speedy enough to be
compliant with this principle.
o Impact on the Design of the Project: One of the DLIs in Component 1 improves the
performance of the recoveries process that is managed by the DIA. In addition, technical
assistance is provided as part of Component 2 to support the necessary changes to the
recoveries process that need to be made to improve the results.
5. Early detection and timely intervention and resolution principle: "The deposit insurer should
be part of a framework within the financial system safety net that provides for the early
detection and timely intervention and resolution of troubled banks. The determination and
recognition of when a bank is or is expected to be in serious financial difficulty should be
made early and on the basis of well-defined criteria by safety-net participants with the
operational independence and power to act."
o Evaluation of the Serbian Deposit Insurance System: Although there is a need to ensure
the early detection and timely intervention for all banks, considering that the recent
failures involved banks in which the state had the largest ownership stake, there are
concerns about the accuracy of the information on some (particularly the smaller ones) of
the state-owned banks. Without accurate information on these banks, there is a gap in the
ability to intervene appropriately if problems do arise.
o Impact on the Design of the Project: One of the DLIs in Component 1 requires an audit of
the asset quality and financial health for the remaining state-owned banks to ensure the
accuracy of the information available. In addition, the same DLI ensures that the MoF, as
the owner, collects accurate information on the state-owned banks on a timely basis.
Component 2 also includes technical assistance for the MoF to develop the capacity to
monitor the state-owned banks.
C. FINANCIAL MANAGEMENT
45. Two separate Designated Accounts for the project (separate for Components 1 and
2) will be held in the NBS. The control environment within the NBS is considered acceptable.
46. Interim un-audited financial reports (IFRs) consolidated for the whole project
(covering both Components 1 and 2) will be prepared for each calendar semester and will
be due 45 days after the end of each semester. An Annual audit of the project financial will be
conducted by a private audit firm acceptable to the Bank. Since the PDO is to strengthen
financial and institutional capacity of DIA, an entity audit of the DIA will also be required for all
calendar years from effectiveness to the project closing.
Component 1: Strengthen the financial capacity of the DIA (EUR144.23 million)
47. This Component aims to finance the DIF. With respect to withdrawals under this
Component, withdrawals from the Designated Account for this Component shall be made for a
respective DLI upon submission by the Borrower, through the Project Implementing Entity, of:
(i) evidence satisfactory to the Bank that transfers to DIF have been made; and (ii) supporting
documentation confirming the achievement of the respective DLI or DLIs.
13
﻿48. The Borrower may withdraw an amount not to exceed the equivalent of
EUR54,490,000 as an advance under Component 1. However, if the DLIs are not achieved (or
only partially achieved), the Borrower will be required to refund the advance.
49. For the purposes of withdrawals under this component, the deposits (that are not to
exceed the amount outlined above) will be transferred to the foreign currency account (EUR)
administered by the DIA (the Designated Account for component 1) within the NBS that is
opened and used solely for proceeds from the loan account. The deposits will then be transferred
to DIF's foreign currency account, exclusively for the purposes of financing the DIF, within
seven days after the advance from the Bank to the Designated Account. Each financing of the
DIF will be confirmed to the Bank within 30 days of it occurring, through delivering appropriate
documentation evidencing the financing of the DIF. Such documentation will include: bank
account statement for the Designated Account showing the transfer to the NBS for deposit in the
DIF account; bank account statement from the NBS showing the transfer, and corresponding
credit, to the DIF account; letter from the NBS confirming the receipt of funds from the
Designated Account, and the deposit of the equivalent amount into the DIF account.
50. Appropriate documentation evidencing the financing of the DIF and evidence of the
achievement of DLIs will constitute the eligible expenditure. Statements of Expenditures will
be utilized to document eligible expenditures under this Component of the Project and the
disbursement method will be advances. Each DLI is given a Euro value (see Table 9), and
subsequent withdrawals up to the same amount as the value of the DLI met to the Designated
Account will be made based on evidence of the financing of the DIF and verification of
achievement of individual DLIs being met. The achievement of DLI 1 and DLI 2 is time-bound
and may be reduced proportionately on a percentage basis corresponding to the respective degree
of DLI achievement. The achievement of DLI 3, 4, 5, and 6 is not time bound (although Table 9
provides indicative time frames for their achievement) and thus a future withdrawal can only be
given if the DLI is achieved fully along with a Statement of Expenditures confirming eligible
expenditure for that amount.
51. The Bank shall not be required to make further deposits into the Designated
Account, for the Component 1 if: (i) the Bank, at any time, is not satisfied that evidence and
supporting documentation required as specified above and in the Project Operating Manual
(POM); or (ii) the Borrower shall have failed to furnish to the Bank, within the period of time
specified, any of the audit reports required to be furnished to the Bank.
52. If the Bank determines at any time that any payment out of the Designated Account
was made for an expenditure, which is not an Eligible Expenditure, or was not justified by
the evidence furnished to the Bank, the Borrower shall, promptly upon notice from the Bank,
provide such additional evidence as the Bank may request, or deposit into the Designated
Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of
such payment. Unless the Bank shall otherwise agree, no further deposit by the Bank into the
Designated Account shall be made until the Borrower has provided such evidence or made such
deposit or refund, as the case may be. Refunds to the Bank made shall be credited to the Loan
Account for subsequent withdrawal or for cancellation in accordance with the provisions of the
Loan Agreement.
14
﻿53. Considering the importance of the DLIs to achieving the PDO, the scope of the
annual audit will be extended to provide independent verification of the achievement of
DLIs. The annual audit will also ensure independent verification that any of the World Bank
financing for the DIF that has been utilized was used solely for deposit insurance and bank
resolution functions in accordance with the applicable laws and regulations.
Component 2: Strengthen the institutional capacity of the DIA (EUR 0.71 m)
54. Due to the small number of contracts and transactions under the component, excel
files are deemed to be sufficient for maintaining accounting records and preparing Interim un-
audited financial reports (IFRs) for the component. Statements of Expenditures will be utilized to
document eligible expenditures under this component of the project and the disbursement
method will be advances.
55. Due to the straightforward design and small size of this Component, the existing
system of internal controls within the project implementing entity will be used as the basis
for internal controls and procedures. Those procedures and controls to be applied in this
Component will be described in the POM that will be prepared by project effectiveness. The
foreign currency Designated Account for Component 2, to which the funds will be withdrawn
to/paid from, will be opened in the NBS and will be administered by the PIE.
D. PROCUREMENT
56. The PIT will carry out all procurement activities financed under the project and
will include staff with the needed experience in World Bank-financed procurement. All
contracts (including those that benefit the MoF) will be signed by the project implementing
entity. The different procurement methods or consultant selection methods, estimated costs, prior
review requirements, and time frame will be agreed between the Borrower and the Bank and
reflected in the Procurement Plan.
57. A draft 18-month Procurement Plan has been developed during appraisal. The plan
was agreed upon between the government and the Bank during negotiations and will be available
in the project's database posted on the Bank's external website and official public procurement
website. The Procurement Plan shall be updated at a minimum annually or as required, to reflect
the actual project implementation needs and improvements in institutional capacity. The updated
plan will be subject to Bank's approval.
E. SOCIAL AND ENVIRONMENT (INCLUDING SAFEGUARDS)
58. Project Components 1 and 2 do not trigger any World Bank environment or social
safeguards policies. Therefore, the project has been assigned a Category 'C' in accordance with
the World Bank safeguard policy OP/BP/GP 4.01.
15
﻿ANNEX 1: RESULTS FRAMEWORK AND MONITORING
REPUBLIC OF SERBIA: Deposit Insurance Strengthening Project
Project Development Objectives
PDO Statement
The project development objective is to strengthen the financial and institutional capacity of the Deposit Insurance Agency, so as to enable it to meet its deposit
insurance and bank resolution obligations and serve as a core part of financial sector safety net.
These results are at Project Level
Project Development Objective Indicators
Cumulative Target Values Data Source/ Responsibility
Methodology for Data
Unit of Baseline YR1 YR2 End Target Collection
Indicator Name Core (Dec. 31, (Dec. 31, (Dec. 31, (June 30, 2016) Frequency
2013) 2014) 2015)
Cumulative inflows [1.25% of the 2.0% of the 2.5% of the
into the DIF
equialen to .5% .00 insured insured deposit insured deposit
ofivlens dos .5%%0 deposit level level of level of Semi-annual Project reports DIA
sfin ury 1epos of December December 31, December 31,
since January 1' 31, 2013 2013 2013
2014
DIA performing its
legally mandated
technical functions
in any future bank Yes/No No Yes Yes Yes Semi-annual Project reports DIA
failures in which
DIF resources are
utilized
16
﻿Intermediate Results Indicators
Cumulative Target Values Data Source/ Responsibility
Methodology for Data
Baseline YR1 YR2 End Target Frequency Collection
Indicator Name Core Unit of (Dec. 31, (Dec. 31, (Dec. 31, (June 30,
Measure 2013) 2014) 2015) 2016)
Verification
Premium rate % 0.4% 0.6% 0.6% 0.4%14 Annual Protocol 1.1, 1.2, DIA
and 1.3
[7 Verification
Stand-by funding available for Amount 00roco n
DIF EUR) 0 200m 50m 0 Annual Protocol 2.1 and DIA
DIF (EUR)2.2
Number of dependent Verification
ging dep e Number 0 1 3 3 Annual Protocol 3.1 and DIA
Managing Board members 3.2
Financial stability committee Semi- Verification
Number 0 2 6 8 Protocol 4.1 and DIA
meetings annual 4.4
Sharing of NBS risk Semi- Verification
information on problematic Yes/No No Yes Yes Yes Protocol 4.2 and DIA
banks with DIA 4.3
Sharing of NBS supervision Semi- Verification
conclusions on problematic Yes/No No Yes Yes Yes Protocol 4.2 and DIA
banks with DIA 4.3
Cumulative value recovered Semi- Verification
~j Amount 00Sem1i-n Oi nna
from bank bankruptcies since ER0.00 20m 11m 10m Protocol 5.1, 5.2 DIA
February 1, 2014 and 5.3
[7 Verification
Information collected by the Vrfcto
InfoFaion collectnedby tYes/No No Yes Yes Yes Annual Protocol 6.2 and DIA
MoF on state-owned banks6.
6.3
14 The baseline and end target are the same as the premium increase of 0.2% will be in place only for 2014 and 2015
17
﻿Project Development Objective Indicators
Indicator Name Description (indicator definition etc.)
Cumulative inflows into the Deposit Insurance Fund This indicator is a measure of the achievement of the target fund size for the Deposit Insurance
equivalent to 2.5 percent insured deposits since January 1, Fund based on the assumptions and analysis in the PAD. It assumes an insured deposit level of
2014 EURI 1.55 billion, which is the level as of December 31, 2013.
DIA performing its legally mandated technical functions in This is a measure of the DIA having the capacity to meet the technical functions that are defined
any future bank failures in which DIF resources are utilized in the Serbian legal framework in the case of a bank failure in which DIF resources are utilized.
Intermediate Results Indicators
Indicator Name Description (indicator definition etc.)
Premium Rate Increasing the premium rate in 2014 and 2016 to increase the level of funding available in the
DIF (DLI 1.1, 1.2 and 1.3)
Stand-by funding available for DIF Putting in place stand-by funding for the DIF (DLI 2.1 and 2.2)
Number of Independent Board Members Altering the composition of the Board of the DIA to improve independence (DLI 3.1 and 3.2)
Financial stability committee meetings Meetings that include the NBS Governor, the Minister of Finance and the Managing Director of
the DIA (a so called "Financial Stability Committee") to discuss any problematic banks should be
held on a quarterly basis to strengthen the coordination between the three financial safety net
providers. (DLI 4.1 and 4.4)
Sharing of NBS risk information with DIA Providing the DIA with the necessary risk information (DLI 4.2 and 4.3)
Sharing of NBS Supervision Conclusions on Problematic Providing the DIA with the necessary information on problematic banks (DLI 4.2 and 4.3)
Banks with DIA
Cumulative value recovered from bank bankruptcies since Improving the performance of the recoveries process (DLI 5.1, 5.2 and 5.3)
February 1, 2014
Information Collected by the MoF on state-owned Banks. Improving the quality of information collected on state-owned Banks (DLI 6.2 and 6.3)
18
﻿ANNEX 2: DETAILED PROJECT DESCRIPTION
REPUBLIC OF SERBIA: Deposit Insurance Strengthening Project
Background on the Deposit Insurance Agency (DIA) and the Deposit Insurance Fund (DIF)
1. The Deposit Insurance Agency (DIA) of Serbia was established in 2005 to provide
deposit insurance, protect depositors, and preserve financial stability5. The Agency
operates primarily under the Deposit Insurance Agency Law, the Deposit Insurance Law, and the
Law on the Assumption of Assets and Liabilitiesl6, which outline the functions of the institution.
The DIA primarily provides 30 member banks with a coverage limit of EUR50,000 per depositor
per institution in the case of a bank failure through depositor reimbursement or other resolution
tools that are chosen on a least-cost basis. The DIA has a "loss minimizer" mandate and utilizes
several resolution tools that are available to it based on the legal framework that aims to
minimize the cost of a bank failure. These resolution tools include the ability to facilitate a
merger with another bank (a purchase and assumption transaction) with financial assistance from
the Deposit Insurance Agency and the establishment of a bridge bank that acquires the assets of a
failed bank with the aim to facilitate a future sale.
2. The financial assets for facilitating the resolution of a failed bank are held within the
Deposit Insurance Fund (DIF). According to the Deposit Insurance Law, the Deposit Insurance
Agency shall establish a special fund called the Deposit Insurance Fund that shall be financed by
"deposit insurance premiums paid by banks, revenues from investments of the Deposit Insurance
Fund's assets, the Agency's claims recovered from the bankruptcy or liquidation estates of banks
on the basis of the insured deposits, sale of a bridge bank, recovery of claims on the basis of
initial capital from the bankruptcy or liquidation estates of bridge banks, borrowings, grants, and
funds from the budget of the Republic of Serbia."
3. Premiums that are charged to banks have been the largest source of revenue for the
DIF. The Deposit Insurance Agency currently charges 0.4 percent of insured deposits to each of
the 30 banks operating in Serbia. Until September 2012, the DIF had EUR211 million in assets
(see Figure 1). From 2010 to 2012, the inflows to the DIF from collected premiums were on
average EUR39 million per year, and for 2013 were EUR46 million. Other inflows to the DIF
(mainly interest on deposits and securities, and proceeds for bankruptcy estates of bankrupt
banks) have amounted to roughly EURI million on average from 2010 to 2013.
4. The Deposit Insurance Fund (DIF) was depleted by the resolution of Agrobanka in
2012. The failure of Agrobanka in 2012 utilized the full EUR211 million in the Deposit
Insurance Fund and left the DIF with further liabilities of EUR34.1 million. The subsequent
failure of two additional banks, RBV in 2012 and PBB in 2013, were resolved via the issuance of
15 The Serbian DIA is the legal successor of the Agency for Deposit Insurance, Bank Rehabilitation, Bankruptcy and
Liquidation that was established in 1989.
16 There are also references to its functions in the Law on Bank and the Law on Bankruptcy and Liquidation of
Banks.
19
﻿government bonds as the DIF had been depleted. All three of these transactions involved a P&A
with Postanska bank with external financial support (which, in the case of Agrobanka, was a
combination of financial resources from the DIF and government bonds, and, in the case of RBV
and PBB, involved only government bonds).
Figure 1: Deposit Insurance Fund Balance (EUR million)
250
200
150
100
50
0*
1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014
Source: Deposit Insurance Fund of Serbia
Financing the DIF with sufficient resources (from external creditors, government budget, bank
premiums, recoveries, and investments) to allow the Deposit Insurance Agency to meet its
deposit insurance and bank resolution obligations and serve as a core part offinancial sector
safety net..
5. This section identifies the level of financing that is required for the DIF to allow the
DIA to meet its deposit insurance and bank resolution obligations. The DIF must be restored
to a level that provides sustainable and credible protection against future bank failures in normal
times. Deposit insurance fund target reserve ratios around the world vary (see Table 1) and are
based on different bank risk profiles in jurisdictions and the methodologies used to determine
fund reserve targets. Best international practices, however, indicate that whatever approach is
taken, an optimal fund target must ensure that depositors can be reimbursed promptly and
balance the potential losses that each deposit insurer is exposed to with the ability of its member
banks to fund the system in normal times. A number of approaches can be used to determine a
target fund size such as methodologies incorporating historical and actuarial prediction
techniques; risk assessment/credit portfolio models; and "bottom-up" size based approaches (see
Box 2).
6. The DIA's current risk assessment/exposure methodology yields a fund reserve
target ratio of approximately 3.0 percent of insured deposits. The DIA's total bank risk
indicator (TBRI) model is based on data collected directly from the DIA's member banks
including measures of capital adequacy, earnings and liquidity weighted by insured deposit
exposure. The model classifies banks into four categories: Category I (normal operations);
Category II (medium risk); Category III (early warning signs); and Category IV (official
receivership). According to this approach the minimum fund target sufficient to cover expected
potential liabilities of banks in categories III and IV is 3.0 percent of insured deposits or EUR346
million at end-2013.
20
﻿Box 2: Overview of Approaches to Developing Deposit Insurance
Target Reserve Fund
The most common approach to developing a target reserve ratio for a deposit insurance fund is to consider
the country's historical experience with bank failures and associated losses. This approach is utilized in a
number of countries including Brazil and the Bahamas. The advantage is that it is relatively straightforward,
understandable and relies on existing information. A shortcoming is that the past may not be a good guide to
the future and it does not take into account the current risk profile of banks and other information, which
may be of use in assessing potential losses.
The risk assessment or credit portfolio approach is a more analytical method to determine a suitable reserve
ratio and is used, for example, in Russia, Singapore, Canada, and the United States. Under these systems the
fund reserve is viewed as being subject to a portfolio of credit risks similar to bank loan portfolio. The
portfolio consists of individual exposures to insured banks, each of which has the potential of causing a loss
to the fund. In most cases there will be a relatively high probability of small losses and a lower probability of
very large losses.
Another methodology used is a "rule of thumb" or "size-based" approach whereby the target reserve fund is
selected to cover the cumulative losses of a significant number of small bank failures and at least one
medium-sized bank. This approach is the most appropriate in Serbia due to the limited history of bank
failures and the staffing and technical capacity of the DIA.
7. A "bottom-up or sized based" approach to establishing a fund target ratio indicates
that a fund of about 2.5 percent of the insured deposits would be reasonable. At 2.5 percent
of the insured deposits (EUR289 million at end-2013), the target fund would be approximately
sufficient to cover the cumulative insured deposit amount of the 10 smallest (out of a total of 30)
banks in Serbia or the total insured deposit amount of the 11th largest bank. Although a larger
sized fund may be desirable, as increasing the fund target to 5.0 percent of the insured deposits at
end-2013 (EUR578) would cover the cumulative insured deposit amount of the 13 smallest
banks or the total insured deposit amount of the 5th largest bank, achieving that level in the near-
term would not be feasible.
8. Once an acceptable fund target size is determined there are two primary sources of
revenue that can be utilized to achieve the target - premiums from banks and government
contributions. The Government of Serbia and the Deposit Insurance Agency have determined
that they would like to achieve a 2.5 percent target ratio in the three years from 2014 to 2016.
This is an aggressive target in such a short period as one simple projection indicates that it would
take the DIA seven years to accumulate a target fund of 2.5 percent of total insured deposits with
the current premium level of 0.4 percent of insured deposits and assuming insured deposit
growth of 4 percent per annum and no additional bank failures. Achieving the 2.5 percent target
ratio would thus require an increase in the premiums paid by the banks either through an increase
in the regular premium or the implementation of an extraordinary premium. In addition, it would
require a significant contribution from the government, which in this case would be financed
through the World Bank loan.
21
﻿Table 1: Target Fund Reserve Ratios in Various Jurisdictions
(Percent of Insured Deposits)
Country Coverage Ratio Country Coverage Ratio2
Argentina 500% Serbia 500%
Brazil 500% Albania 500%
Canada 100% USA 135%
Columbia 500% Taiwan 200%
Hong Kong 025% Kenya 1900%
India 225% Jordan 300%
Korea 1 00% Jamaica 200%
Singapore 030% Kazakhstan 500%
Russia 500% EU (proposed) 150%
Average (excluding Kenya) 2.90%
Source: International Association of Deposit Insurers
9. A number of options exist in terms of increasing premium income. The 0.4 percent
annual premium rate in use presently is similar to a number of other South-East European
nations and slightly higher than the average of 0.32 percent calculated from a sample of 21
countries (see Table 2), and thus increasing the regular premiums is not recommended. Rather
the use of premium surcharges or "extraordinary premium increases" for a short period of time is
more appropriate and numerous countries have instituted this type of premium increase within
their legal framework for deposit insurance. For example, a special premium may be assessed on
insured institutions when the deposit insurance fund falls into deficit in Australia, Azerbaijan,
Canada, Kazakhstan, Malaysia, Russia and Singapore. In addition, one could also institute a
differentiated premium based on the risk-profile of banks as this has also been instituted in many
countries, but this is not recommended in Serbia at this time due to the complexity of instituting
this type of system.
10. To reach the appropriate target fund level of 2.5 percent of the insured deposits by
end-2016, premiums should be increased for all member banks to 0.6 percent per annum
(total including the regular and extraordinary premium) in 2014 and 2015. Figure 2 presents
a scenario that assumes: (1) insured deposit growth of 4 percent per annum over the five-year
forecast period; (2) EUR144.23 million financing by the government in 2014 and 2015; (3)
regular premiums of 0.4 percent of insured deposits; (4) implementation of an extraordinary
premium in 2014 and 2015 of 0.2 percent; and (5) no additional bank failures that result in
payments from the DIF. This scenario achieves the target fund size in mid-2016.
22
﻿Table 2: Maximum Premium Rates (% of Insured Deposits) in Various Countries
Country Premium range Country Premium range2
Argentna 015-030% Serbia 040%
Brazil 00125% Albania 040-050%
Canada 0028-022 % Croata 050-220%
Germany 002% Mexico 040%
Hong Kong 002-005% Japan 015%
India 010% Russia 040%
Jordan 025% Taiwan 005-015%
USA 0025-045% Romania 050%
Turkey 0011 -0-20% Hungary 030-20%
Average 0.32%
Source: International Association of Deposit Insurers
11. The government should also put in place a stand-by facility or government
guarantee that will ensure that sufficient funds are available prior to the other funds
becoming available to the DIF. This is in line with international best practice in which a
Deposit Insurance Fund has a mechanism for accessing funds quickly and without the need for
parliamentary approval if the need arises. For 2014, the stand-by facility should be at least
EUR200 million and in 2015 it should be at least EUR50 million to ensure that funds are readily
available to the DIF to meet the short-term target fund size of 2.5 percent of insured deposits that
has been established by the government.
Figure 2: Forecast of DIF inflows, EUR million17
400 2.5% of
insured
300 -
200 -
100
0
tK 12 tKO N N~ 11 27 10, N$ 05O N
Source: Team analysis
17 Based on the assumptions outlined in paragraph 10
23
﻿Ensuring that the Deposit Insurance Agency has the institutional capacity to manage the
financial resources it has available.
12. This section outlines key areas that need to be strengthened in the Deposit Insurance
Agency of Serbia in order to manage the financial resources that it has available. In order to
assess the capacity of the Deposit Insurance Agency to manage the financial resources available
and to identify specific areas where improvements are needed, an assessment of the Serbian
Deposit Insurance Agency's compliance with the Core Principles of Deposit Insurance that were
adopted by the International Association of Deposit Insurers (IADI) and Basel Committee on
Banking Supervision was conducted as part of the preparation of the project. These 18 core
principles encompass not just the activities of the DIA but the legal framework, approach, and
actions of the entire safety net with respect to protecting insured depositors and contributing to
financial stability.
13. Based on the assessment completed, the Serbian DIA is not compliant with the core
principles in four categories. These four are: 1) governance, 2) information sharing between
financial safety net providers; 3) recoveries; 4) and early detection and timely intervention and
resolution. In addition to these four, the DIA was also not compliant with the core principle on
funding since the deposit insurance fund that it manages has been depleted by the recent bank
failures. The rest of this section provides background on each of these four areas in the context of
the Serbian DIA and outlines the key areas that need strengthening.
Governance
14. The Core Principle on Governance states a Deposit insurer should be "operationally
independent, transparent, accountable and insulated from undue political and industry
influence." Based on the Serbian Deposit Insurance Agency Law, the Managing Board of the
DIA is comprised of seven members: a Chairman (as proposed/appointed by the government);
the Minister of Finance; the Minister of Economy; the Vice-Govemor of the NBS responsible for
bank supervision; a member proposed by the NBS; a member proposed by the Association of
Banks; and member proposed/appointed by the government. Terms are limited to six years and
members may only be removed for cause, but the Board members are usually replaced when a
new government is formed and the ministers (who are on the Board) are changed.
15. The Managing Board of the DIA's operational independence and accountability are
limited due to the composition. Half of the Board is represented by ex-officio members from
the government or NBS. In addition the position held by the member from the Association of
Banks could present potential conflicts of interest with respect to discussion of the risk profile of
member banks and intervention actions. Although it is appropriate and consistent with best
practices for the government to appoint representatives to the Managing Board, they should not
be ex-officio members. In addition, in line with international best practices independent members
from the private sector (although not currently employed by one of the banks) should also be
included.
24
﻿Information sharing between financial safety net providers
16. The Core Principle on the "relationships with other safety-net participants" focuses
on ensuring that a Deposit Insurance Agency has the necessary information from the
banking supervisor to meet its mandate. The principle states "that a framework should be in
place for the close coordination and information sharing, on a routine basis as well as in relation
to particular banks, among the deposit insurer and other financial system safety-net participants.
Such information should be accurate and timely (subject to confidentiality when required).
Information-sharing and coordination arrangements should be formalized."
17. Information sharing and coordination agreements have been developed between the
DIA, NBS, and MOF. The MOU on Referring to the Direct Cooperation and Information
Exchange Regarding Deposit Insurance addresses information sharing between the NBS, DIA
and MOF and confidentiality provisions. The MOU entitled Agreement on Collaboration for the
Maintenance of Financial Stability in the Republic of Serbia identifies the key issues and factors
in crisis management for the above-mentioned parties. A key element is the creation of a
Financial Stability Council (FSC) that is supposed to plan and decide how to resolve failing
banks and to deal with ongoing and potential financial sector stability issues. The FSC includes
the Governor of the NBS, the Minister of Finance, and the Managing Director of the Deposit
Insurance Agency.
18. In practice the MOUs and other mechanisms put in place do not provide the
necessary level of information flow and coordination to support the DIA. The results of
regular supervisory examinations and internal risk analysis by the NBS are not provided to the
DIA. While the DIA receives some data on banks' capital adequacy ratios, liquidity, and cash
flow, it does not receive stress testing information or data about the quality of banks' assets (such
as the level of non-performing loans) and must collect additional data for use in its risk
assessment model. The FSC also does not meet regularly nor does it conduct regular contingency
planning. Moreover, the terms for the exchange of information are overly qualified (e.g. "in due
time" and which "could be useful to the other party"), and does not ensure that the necessary
information is provided to the DIA in a timely manner. The information received on depositor
liabilities also does not include more accurate information on the net amount of insured deposits
held by individual depositors (after set-off),which is needed to improve the timeliness of the
reimbursement process.
19. Good practices in information sharing and coordination used in other countries
should be adopted where appropriate. In Canada, the United States and Poland both the
statutes of the supervisory authority and deposit insurer require each organization to make
available all information requested from each party, subject to confidentiality. The Canadian
authorities, for example, have in place statutory requirements for information sharing and have
developed a Guide to Intervention for Federal Financial Institutions -- which sets out clearly the
roles and responsibilities of the agencies during each early warning and intervention stage for a
troubled institution. The heads of the supervisory authority and deposit insurer have also
developed a strategic alliance agreement, which provides more specific details on information
and sharing processes for each agency. These arrangements are backed-up by coordinating
committees, which meet regularly and report to each other on their activities.
25
﻿20. In line with international best practices, the Serbian DIA should receive more
information in advance from the NBS in order to allow it to better anticipate and plan for
failures. The DIA should receive more information in advance from the NBS about banks that
are in financial difficulty or expected to be in financial difficulty (e.g. regular reports on the risk
profile of member banks and comprehensive data on asset quality, provisions, large exposures
and stress tests from supervision reports). This would enable the DIA to perform a least cost
evaluation and undertake earlier preparation for depositor reimbursement or the use of other
resolution tools.
Recoveries
21. The Core Principle on Recoveries states that the "management of the assets of the
failed bank and the recovery process (by the deposit insurer or other party carrying out
this role) should be guided by commercial considerations and their economic merits." In
addition, if the deposit insurer plays a role in the recovery process, its role is clearly defined in
law or regulation and the deposit insurer maximizes recoveries to the extent that it can from the
failed bank on a commercial or economic basis.
22. The Serbian Deposit Insurance Agency serves as the bankruptcy administrator for
bank bankruptcy cases, and as collector for government claims based on bad assets carved
out of banks undergoing sale, restructuring or transfer. The Deposit Insurance Agency is
currently overseeing the liquidation of 18 ongoing bank bankruptcies. Most of the value of these
assets is associated with the four largest public banks that were privatized and placed into
liquidation in early 2002 (Beogradska, Beobanka, Investbank, and Jugobanka), which combined
constituted about 80 percent of banking assets in the Serbian market at the time. The total actual
book value of the assets for these 18 banks is estimated to be EUR3.5 billion. However, over 90
percent of the total assets under bank bankruptcy proceedings pertain to debtors mostly subject to
legal proceedings that preclude immediate recovery. These include claims by the bankrupt banks
against state-owned enterprises in the privatization process and debtors in bankruptcy. However,
the DIA will be the primary creditor for any future bank resolutions in which the DIA contributes
funds. During the past few years, the asset recovery process has contributed about EUR35
million to the Serbian budget.
23. Although there are significant hurdles in closing the bankruptcy cases and
recovering assets from the current 18 cases, there are opportunities to improve and speed
up the auction process in order to maximize the recovery of assets managed by the Deposit
Insurance Agency. Bankruptcy auctions are the primary mode of recovery for the most valuable
assets that are part of the portfolio of assets to be recovered (primarily fixed assets and real
estate). However, the auction methodology that has been adopted by the DIA, in some cases,
limits the potential for a successful auction. Improving this methodology could improve the
results from the recovery of assets managed by the DIA.
24. Improving the recovery process is not only important for realizing as much value
from the current assets from bankrupt banks, but more importantly for the DIA to
improve its capacity if another bank failure occurs in the future. Although the DIA is not a
creditor in the current bankruptcy cases, improvements in the recoveries process and the
framework for auctions will ensure that they have a sound time-bound strategic framework for
26
﻿completing the bankruptcy process in the future when funds from the DIF are utilized for a
resolution.
Early detection and timely intervention and resolution
25. The Core Principle on early detection and timely intervention and resolution states
that a framework should exist that "provides for the early detection and timely
intervention and resolution of troubled banks." Although this principle should apply to all
banks, the three recent failures were banks in which the state had the largest ownership stake.
Considering this, there is a need to validate the information available for some of the smaller
state-owned banks in order to ensure early detection and timely intervention of these banks in the
near-term.
Project Design
26. In addition to the project description provided in the main text, this section gives a
detailed description of the project components.
Component 1: Strengthen the financial capacity of the DIA (EUR144.23 million)
27. This component finances the DIF with EUR144.23 million. In addition to confirmation
of the financing the DIF, disbursements require the achievement of DLIs in six categories
(Figure 3). Each DLI is given a Euro value, with the total amount for achieving all of the DLIs
equaling the amount available in this component. Time frames for the achievement of the DLIs
have been developed in 2014, 2015 and 2016, but they are indicative and disbursements can
occur at any point when the DLIs have been achieved and the eligible expenditure corresponding
to the financing of the DIF has been completed.
28. The disbursement linked indicators are summarized in the subsequent paragraphs.
The choice of the DLIs was based on the areas that the IADI Core Principles Assessment
identified as weaknesses in the Serbian Deposit Insurance System.
Disbursement Linked Indicator #1 - Premiums
29. The target fund size of 2.5 percent of the insured deposits can be met through the
implementation of an extraordinary premium increase and the financing of the DIF by the
government of EUR144.23 million. This extraordinary increase will need to be at least 0.2
percent of insured deposits in 2014 and 2015 in order to meet the agreed target fund level of 2.5
percent of the insured deposits in three years (in addition to the regular 0.4 percent premiums
that are currently charged). The DLIs for the three disbursement periods are outlined in Table 3
and will ensure that the target fund size of 2.5 percent of insured deposits will be met during
2014-2016.
27
﻿Table 3: DLIs for Premiums
2014 Target Date = 2015 Target Date = 2016 Target Date=
November, 2014 May, 2015 11 May, 2016
DLI #1: DLI# 1.1: Premiums DLI#1.2: Premiums DLI#1.3: Premiums
Premiums equal to 0.15 percent of equal to 0.15 percent of equal to 0.15 percent of
insured deposits for insured deposits for insured deposits for
each of the first two each quarter of the each quarter of calendar
quarters of 2014 are calendar year of 2014 years 2014 and 2015 are
collected for all banks are collected for all collected for all banks
that are licensed in the banks that are licensed that are licensed in the
Republic of Serbia at in the Republic of Republic of Serbia at
the time of collection Serbia at the time of the time of collection
(insured deposit level is collection (insured (insured deposit level is
based on average of deposit level is based on based on average of
previous quarter) by average of previous previous quarter) by
November 30, 2014 quarter) by May 31, May 31, 2016
2015
Disbursement Linked Indicator #2 - Back-up funding for the DIF
30. The second set of DLIs will ensure that the DIF has back-up funding in place in case
it is necessary (see Table 4) As mentioned earlier, best practice for Deposit Insurance Schemes
includes having a back-up facility that ensures that funds can be accessed without parliamentary
approval during a time of banking instability. Thus, the second set of DLI ensures that the
government puts in place a guarantee or stand-by facility of at least EUR200 million in 2014 and
EUR50 million in 2015 (the decrease is due to the increasing financial flows into the DIF during
2014 and thus decreasing the need for back-up funding).
Table 4: DLIs for Back-up funding
2014 Target Date 2015 Target Date 2016 Target Date
June, 2014 January, 2015
DLI#2. 1: the government DLI#2.2: the government N/A
DLI #2: has back-up funding in has back-up funding in
Back-up the budget for financial the budget for financial
funding stability (which includes stability (which includes
the DIF) of at least the DIF) of at least
EUR200m for 2014 EUR50m for 2015
28
﻿Figure 3: Outline of Serbian Deposit Insurance Agency Strengthening Project
Project Development Objective Component 1 Component 2
Component 1: DLI #1
Increase the capital base of
the DIF through premium-
related revenue from Banks
Financing the DIF with sufficient resources
(from external creditors, government Component 1
budget, bank premiums, recoveries, and EUR 144.23 capitalization of
investments) to allow the Deposit Insurance the DIF
Agency to meet its deposit insurance and
bank resolution obligations.Copnt1.DI#
____j Component 1: DLI #1
Ensure back-up funding for
the DIF
Strengthen the financial and institutional
capacity of the Deposit Insurance Agency, Component 1: DLI #3 Component 2: Technical Assistance
so as to enable it to meet its legal deposit Improve the DIA's A senior international expert will be hired to advise
insurance and bank resolution obligations governance bodies' - the Managing Board and management of the DIA
and serve as a core part of financial sector independence
safety net.
Component 1: DLI #4 Component 2: Technical Assistance
Improve Information Consulting services will be provided to the ensure
Sharing among Financial that the DIA has the adequate technical capacity to
Safety Net Providers utilize the information that is provided by the NBS
Ensuring that the Deposit Insurance Agency Component 1: DLI#5 Component 2: Technical Assistance
Improve Ifovrieo Consulting services will be provided to improve the
has the institutional capacity to manage the Iro ao pce recoveries process
financial resources it has available
Component 1: DLI #6 Component 2: Technical Assistance
Improve Early Detection Consulting services will be provided to increase the
and Timely Intervention of capacity of the MoF to oversee the state-owned
State Owned Banks banks
﻿Disbursement Linked Indicator #3 - Governance
31. The third set of DLIs will address the issues outlined earlier related to the
independence of the Governance of the Deposit Insurance Agency. DLIs have been designed
to put in place three Independent Directors over the course of two years. In addition, the
composition of the Managing Board will also be changed to give the Independent Directors the
majority on the Board (see Table 5). Independence will be defined to (1) exclude individuals
who: (i) primarily derive their income directly from the government; (ii) work for the NBS, (iii)
work for agencies founded by the Republic of Serbia; (iii) work for public enterprises; (iv) work
for a bank that operates in Serbia, or are members of the board of such banks; or (v) are members
and/or employees and/or officers of any professional banking association, or of an entity related
to it; and (2) not to exclude individuals who carry out academic or research functions (in any
capacity) for research institutions or universities owned or funded by the Republic of Serbia.
Additionally, the independent board members should have the minimum following
qualifications: at least eight years of prior relevant experience in the financial sector, finance, law
or auditing, or academia and research institutes (including those that are publically funded).
Table 5: DLIs for Governance
2014 Target Date 2015 Target Date 2016 Target Date
January, 2015 January, 2016
DLI #3: N/A DLI#3.1: One DLI#3.2: The DIA's
Governance independent board managing board is
member is appointed and constituted by at least
serving as a member of three serving
the DIA's managing independent board
board members that make up
a majority of the board
and no government
ministers
Disbursement Linked Indicator #4 - Information Sharing between Financial Safety Net
Providers
32. In order to strengthen the coordination between the three financial safety net
providers, DLIs (see Table 6) will target the sharing of key data between the NBS and the
DIA. Specifically, data will be shared on: i) the risk profile of all problematic banks in Serbia as
computed by the NBS; (ii) conclusion of supervision reports for banks which are considered
problematic; and (iii) details on all enforcement actions and compliance related to problematic
banks. In addition, the DLIs will require that meetings are held on a quarterly basis with the NBS
Governor, the Minister of Finance and the Managing Director of the DIA to discuss any
problematic banks (the so called "Financial Stability Committee").
30
﻿Table 6: DLIs for Information Sharing
2014 Target Date = 2015 Target Date = 2016 Target Date
July, 2014 January, 2015 January, 2016
DLI #4: DLI#4.1: The DLI#4.2: The NBS has DLI#4.3.: The DIA has
Information Government's Financial shared with the DIA shared with the Project
Sharing Stability Committee the following data for Implementing Entity
between holds two quarterly at least one calendar the following data for
Financial meetings since January quarter starting on at least five calendar
Safety Net 1, 2014 January 1, 2014: (i) the quarters starting on
Providers risk profile of all January 1, 2014: (i)
problematic banks as the risk profile of all
computed by the NBS; problematic banks as
(ii) conclusion of computed by the NBS;
supervision reports for (ii) conclusion of
banks which are supervision reports for
considered banks which are
problematic; and (iii) considered
details on all problematic; and (iii)
enforcement actions details on all
and compliance related enforcement actions
to problematic banks and compliance related
to problematic banks
DLI#4.4.: The
Government's Financial
Stability Committee
meets on a quarterly
basis for at least eight
calendar quarters
between 2014 and 2016
Disbursement Linked Indicator #5 - Recoveries
33. The Deposit Insurance Agency's mandate also includes collecting receivables from
bank bankruptcies and liquidations as outlined earlier. The DLIs related to recoveries will
speed up the recoveries process for the assets from banks in bankruptcy that the DIA currently
manages (see Table 7). The current level of recoveries over the past several years has averaged
EUR4q million per year. The targets for recoveries will be a 25 percent increase in 2014 (EUR5
million) and 50 percent increase in 2015 (EUR61 million).
31
﻿Table 7: DLIs for Recoveries
M 2014 Target Date =2015 Target Date =2016 Target Date=
August, 2014 January, 2015 January, 2016
DLI #5 DLI#5.1: EUR20m DLI #5.2: EUR50m DLI#5.3: EURI 10m
Recoveries recovered from bank recovered from bank recovered from bank
bankruptcies and bankruptcies and bankruptcies and
deposited into a deposited into a deposited into a
Systemically Important Systemically Important Systemically Important
Bank(cumulatively since Bank (cumulative since Bank (cumulative since
February 1, 2014) February 1, 2014) February 1, 2014)
Disbursement Linked Indicator #6 - Early detection and timely intervention and resolution
34. A critical element of a Deposit Insurance System is the early detection of
problematic banks. Although this applies to all banks, considering that the insolvency of the
DIF resulted from the failure of three banks in which the state had an ownership stake, there are
concerns about the accuracy of the information on some of the smaller state-owned banks that
should be addressed in the near-term. Thus, the DLIs will target the collection of accurate
information on the state-owned banks by the owner (the government) and the sharing of this
information with the Deposit Insurance Agency (see Table 8 below)
Table 8: DLIs for Early Detection and Timely Intervention and Resolution
M 2014 Target Date = 2015 Target Date = 2016 Target Date=
August, 2014 January, 2015 January, 2015
DLI #6 DLI#6.1: All banks DLI #6.2: The DLI#6.3: The
Early with at least 20 government has government has
detection percent state collected information on collected information on
and timely ownership (and not in each bank with at least each bank with at least
intervention the privatization 20 percent state 20 percent state
and process) conduct an ownership for at least ownership for at least
resolution audit and provide the one calendar year since two calendar years since
(of state- information to the January 1, 2014, January 1, 2014
owned Ministry of Finance including at least: (i) including at least: (i)
banks) detailed financial detailed financial
information; (ii) information; (ii)
information on asset information on asset
quality; and (iii) actions quality; and (iii) actions
needed to meet needed to meet
supervision standards supervision standards
35. The full set of Disbursement Linked Indicators is included in Table 9. The table
includes not only the DLIs, but also the Euro amount associated with each DLI.
32
﻿Component 2: Strengthen the institutional capacity of the DIA (EURO. 71 million)
36. This component will finance technical assistance in critical areas that are needed to
achieve the DLIs (Component 2a). Figure 3 outlines TA required to achieve the DLIs in four of
the six categories. The TA will involve only consulting services and will focus on:
* Governance (EUR90,000): A senior international expert will be hired to advise the
management of the DIA. Advice will be provided on developing an operational
manual for the Managing Board of the DIA and ensuring that it has the capacity to
meet its legally mandated requirements. The Advisor will also help develop a staffing
strategy for the DIA. In addition, the Advisor will assist the Managing Board in
ensuring that the DLIs are met and identify any areas that require early intervention.
* Information sharing between safety net providers (EUR130, 000): Consulting services
will be provided to ensure that the DIA has the adequate technical capacity and
staffing to utilize the information that it is provided from the NBS. This task will be
performed by three local consultants with experience in bank supervision, auditing, or
financial analysis. The consultants will develop procedures on how the data provided
by NBS is utilized in planning and decision making.
* Recoveries (EUR 240,000): Consulting services will be provided to develop a time-
bound strategy and implement it over the course of two years. For this purpose one
local lawyer will be hired along with four local consultants, all with experience in
recoveries. The primary goal will be acceleration and scaling up of recoveries in the
various bankruptcies in which the DIA is the administrator.
* Oversight of state-owned banks (EUR205,000): Consulting services will be provided
to increase the capacity of the MoF to oversee the state-owned banks and improve the
corporate governance framework. A local lawyer with experience in financial
legislation, audits and corporate governance will be engaged. Also, three local
consultants with experience in audits and financial analysis will be engaged to develop
procedures for monitoring state-owned banks and to analyze the information provided
to ensure informed decision making in the MoF.
37. This component will also finance TA to support the project implementing entity
(Component 2b). EUR41,750 will be utilized to support the monitoring and evaluation functions
related to the DLIs, as well as other critical functions to strengthen the project implementing
entity related to financial management and procurement.
33
﻿Table 9: Disbursement Linked Indicators for the Serbia Deposit Insurance Strengthening Project
Disbursement Linked Indicator EUR
DLI 1. Increase DLI#1.1: Premiums equal to 0.15% of insured deposits for each of the first two quarters of DLI#1.1: 21,800,000
the capital base 2014 are collected for all banks that are licensed in the Republic of Serbia at the time of
of the DIA collection (insured deposit level is based on average of previous quarter) by November 30,
through 2014
increased
premium- DLI#1.2: Premiums equal to 0.15% of insured deposits for each quarter of the calendar year DLI#1.2: 21,800,000
related revenue of 2014 are collected for all banks that are licensed in the Republic of Serbia at the time of
from banks collection (insured deposit level is based on average of previous quarter) by May 31, 2015
DLI#1.3: Premiums equal to 0.15% of insured deposits for each quarter of calendar years DLI#1.3: 7,270,000
2014 and 2015 are collected for all banks that are licensed in the Republic of Serbia at the
time of collection (insured deposit level is based on average of previous quarter) by May 31,
2016
DLI 2. Ensure DLI#2. 1: the government has back-up funding in the budget for financial stability (which DLI#2.1: 7,270,000
back-up includes the DIF) of at least EUR 200,000,000 for 2014, by November 30, 2014
funding for the
DIF DLI#2.2: the government has back-up funding in the budget for financial stability (which DLI#2.2: 3,630,000
includes the DIF) of at least EUR 50,000,000 for 2015, by May 31, 2015
DLI 3. DLI#3.1: One independent board member (as independence criteria is defined in the Project DLI# 3.1: 7,270,000
Improve the Operations Manual) is appointed and serving as a member of the DIA's managing board
DIA's
governance DLI#3.2: The DIA's managing board is constituted by at least three serving independent DLI# 3.2: 10,530,000
bodies' board members (as independence criteria is defined in the Project Operations Manual) that
independence make up a majority of the board and no Borrower's ministers
34
﻿Disbursement Linked Indicator EUR
DLI 4. DLI#4. 1.: The government's Financial Stability Committee meets on a quarterly basis for at DLI#4.1: 3,630,000
Improve the least two calendar quarters starting on January 1, 2014
DIA's ability DLI#4.2: The NBS has shared with the DIA's the following data for at least one calendar DLI#4.2: 7,270,000
to anticipate quarter starting on January 1, 2014: (i) the risk profile of all the problematic banks as
anrles t computed by the NBS; (ii) conclusion of supervision reports for banks which are considered
problematic problematic based on the current legal framework; and (iii) details on all enforcement
actions and compliance related to problematic banks
DLI#4.3.: The NBS has shared with the DIA the following data for at least five calendar DLI#4.3: 3,630,000
quarters starting on January 1, 2014: (i) the risk profile of all the problematic banks as
computed by the NBS; (ii) conclusion of supervision reports for banks which are considered
problematic based on the current legal framework; and (iii) details on all enforcement
actions and compliance related to problematic banks
DLI#4.4.: The government's Financial Stability Committee meets on a quarterly basis for at DLI#4.4: 2,910,000
least eight calendar quarters between 2014 and 2016
DLI 5. DLI#5. 1: EUR 20,000,000 recovered from bank bankruptcies and deposited into a DLI#5.1: 3,630,000
Improve the Systemically Important Bank(cumulatively since February 1, 2014)
DIA's asset
recovery DLI #5.2: EUR 50,000,000 Euros recovered from bank bankruptcies and deposited into a DLI#5.2: 3,630,000
process Systemically Important Bank (cumulative since February 1, 2014)
DLI#5.3: EUR 110,000,000 Euros recovered from bank bankruptcies and deposited into a DLI#5.3: 3,630,000
Systemically Important Bank (cumulative since February 1, 2014)
DLI 6. Ensure DLI#6. 1: All banks with at least 20% state ownership (and not in the privatization process) DLI#6.1: 18,160,000
that the conduct an audit and provide the information to the Ministry of Finance
government DLI #6.2: The government has collected information on each bank with at least 20% state DLI#6.2: 10,900,000
and the DIA ownership for at least one calendar year since January 1, 2014, including at least: (i) detailed
have adequate financial information; (ii) information on asset quality; and (iii) actions needed to meet
information on
theostat n o supervision standards
the state-
owned banks DLI#6.3: The government has collected information on each bank with at least 20% state DLI#6.3: 7,270,000
ownership for at least two calendar years since January 1, 2014 including at least: (i)
detailed financial information; (ii) information on asset quality; and (iii) actions needed to
meet supervision standards
Total C144,230,000
35
﻿ANNEX 3: IMPLEMENTATION ARRANGEMENTS
REPUBLIC OF SERBIA: Deposit Insurance Strengthening Project
Project Institutional and Implementation Arrangements
1. The DIA will serve as the Project Implementing Entity for both Components 1 and
2. The institutional and implementation arrangements are relatively straight forward, as
Component I has relatively few disbursements against a relatively small number of DLIs, and
Component 2 involves a small number of consulting contracts. In order to facilitate the project, a
Project Implementation Team (PIT) has been established in the DIA. The principal PIT activities
will comprise: (i) verifying DLIs achievement for purposes of disbursement; (ii) reporting on the
Bank advances that result in the financing of the DIF; (iii) managing TA procurement; and (iv)
liaising with and reporting to the government and with the World Bank on project progress.
2. The Borrower shall, at all times, ensure that, the Project Implementing Entity
maintains governance arrangements and a financial management system adequate to reflect the
operations, resources and expenditures of the PIT, acceptable to the Bank.
Financial Management, Disbursements and Procurement
Financial Management and Disbursements
3. Financial management risk. The overall FM Risk is assessed to be moderate, after
taking into account mitigation measures.
4. Project Implementing Entity staffing. The project will be implemented by the DIA
through a Project Implementing Team that has the same staff that implemented the World Bank's
Pensions Administration project which closed in 2012 (including the financial management
officer and disbursement officer). Standard World Bank Terms of Reference for Financial
Management Staff with detailed descriptions of duties will be used for the project. The PIT will
be responsible for the project's financial management arrangements and the team in charge of the
FM will perform tasks related to accounting, financial reporting, disbursement, ensuring
application of internal controls related to financial management and work with the external
auditors during the audit of financial statements.
5. Planning and Budgeting. There is sufficient capacity for planning and budgeting to
manage project funds. Variances of actual versus budgeted figures will be monitored on a regular
basis, appropriately analyzed and, based on the results, corrective actions will be taken.
6. Accounting System. The accounting policies and procedures are appropriate. Due to the
small number of contracts and transactions under the project, excel files are deemed to be
sufficient for maintaining accounting records. Accounting records will also include appropriate
analytics of expenditures per contract and for each specific payment. The project will follow
cash based accounting (cash based IPSAS), recording transactions when actual payment is done,
rather than when they are incurred. Transactions will be accounted for within eight days after
incurring. There will be appropriate back up of accounting records on external drives, as well as
36
﻿appropriate security regulation with regard to access and editing rights of the financial
information.
7. Internal controls. The existing system of internal controls within the project
implementing entity will be used as the basis for internal controls and procedures. These
procedures and controls to be applied in the project were described in the POM that was prepared
prior to negotiations and which will be finalized by project effectiveness. Some of the key
internal controls to be applied for the project include:
- appropriate authorization and approval of all purchases, relevant documentation,
transactions of payments, etc.;
- segregation of duties as different persons are responsible for different phases of a
transaction;
- reconciliations between project accounting records and other relevant sources of
information (Client Connection, bank account statements etc.) should be performed at
least monthly by the Finance Officer; and
- original documentation exists to support all project transactions.
8. Financial Reporting. Interim un-audited financial reports (IFRs) that will include
financial information relating to the whole project (both Components 1 and 2) will be prepared
for each calendar semester (January 1-June 30; July 1-December 31) and will be due 45 days
after the end of each semester. The IFRs will be prepared in line with cash based IPSAS. The
format of the IFRs is agreed to between the Bank and the Client and attached to the minutes of
negotiation. The reporting currency will be EUR. The IFRs are intended to comprise the
following reports:
a) Cash receipts and payments, including comparison of budgeted versus actual amounts;
b) Uses of funds by activity;
c) Designated Accounts statement;
d) Accounting policies and explanatory notes.
9. External audit. An annual audit of the project financial statements will be conducted by
a private audit firm acceptable to the Bank and it will be extended to provide independent
verification of achievement of DLIs in relation to Component 1. In addition, the audit will verify
that any of the World Bank's financing for the DIF was utilized in line with the legal framework
for deposit insurance and bank resolution. An entity audit of DIA will also be required for all
calendar years from effectiveness to the project closing. The audit reports will be submitted to
the Bank not later than six months after the end of the audited period. The audit of project
financial statements will be funded by the project (Component 2), while the audit of the financial
statements of the project implementing entity will be covered by their own resources. The
audited financial statements of the project will be posted by the client on the DIA or government
website, within two weeks of the audit report being issued by the auditor and accepted by the
World Bank. The control environment within the NBS is considered acceptable.
10. Action plan. The following action will be implemented to enhance the financial
management arrangements. This action will not represent a legal covenant.
37
﻿Action Deadline Responsible
POM will be prepared that describes Project Effectiveness DIA
controls and procedures for the project
11. Financial management covenants. The financial management covenants for the project
will be as follows:
a) Maintaining adequate financial management system within, and adequate control
environment within the NBS.
b) DIA will prepare interim un-audited financial reports (IFRs) for each calendar semester
(January 1-June 30; July 1-December 31) and deliver to the Bank not later than 45 days
after the end of the reporting semester.
c) Annual project and entity financial statements will be audited by a private audit firm
acceptable to the Bank and such audit will be delivered to the Bank not later than six
months after the end of the audited period.
d) In the event that in any given calendar year the DIF Assets become less than the sum of
the Transfers to the DIF, the annual audit report shall confirm that the difference is
justified to fulfill the DIA's deposit insurance and bank resolution obligations, in
accordance with the applicable laws and regulations, notwithstanding any minor
variations that may occur to due to DIF's investment policy.
12. Flow of funds. Two separate designated accounts in foreign currency will be opened for
Components 1 and 2 within the NBS and will be administered as described further in the text.
Component 1: Strengthen the financial capacity of the DIA (EUR144.23 million)
13. This component aims to finance the DIF. With respect to withdrawals under this
component, withdrawals from the Designated Account for this component shall be made for a
respective DLI upon submission by the Borrower, through the Project Implementing Entity, of:
(i) evidence satisfactory to the Bank that transfers to DIF have been made; and (ii) supporting
documentation confirming the achievement of the respective DLI or DLIs.
14. The Borrower may withdraw an amount not to exceed the equivalent of
EUR54,490,000 as an advance under Component 1. However, if the DLIs are not achieved (or
only partially achieved), the Borrower will be required to refund the advance.
15. For the purposes of withdrawals under this component, the deposits (that are not to
exceed the amount outlined above) will be transferred to the foreign currency account (EUR)
administered by the DIA (the Designated Account for component 1) within the NBS that is
opened and used solely for proceeds from the loan account. The deposits will then be transferred
to DIF's foreign currency account, exclusively for the purposes of financing the DIF, within
seven days after the advance from the Bank to the Designated Account. Each financing of the
DIF will be confirmed to the Bank within 30 days of it occurring, through delivering appropriate
documentation evidencing the financing of the DIF. Such documentation will include: bank
account statement for the Designated Account showing the transfer to the NBS for deposit in the
DIF account; bank account statement from the NBS showing the transfer, and corresponding
credit, to the DIF account; letter from the NBS confirming the receipt of funds from the
Designated Account, and the deposit of the equivalent amount into the DIF account.
38
﻿16. Appropriate documentation evidencing the financing of the DIF and evidence of the
achievement of DLIs will constitute the eligible expenditure. Statements of Expenditures will
be utilized to document eligible expenditures under this Component of the Project and the
disbursement method will be advances. Each DLI is given a Euro value (see Table 9), and
subsequent withdrawals up to the same amount as the value of the DLI met to the Designated
Account will be made based on evidence of the financing of the DIF and verification of
achievement of individual DLIs being met. The achievement of DLI 1 and DLI 2 is time-bound
and may be reduced proportionately on a percentage basis corresponding to the respective degree
of DLI achievement. The achievement of DLI 3, 4, 5, and 6 is not time bound (although Table 9
provides indicative time frames for their achievement) and thus a future withdrawal can only be
given if the DLI is achieved fully along with a Statement of Expenditures confirming eligible
expenditure for that amount.
17. The Bank shall not be required to make further deposits into the Designated
Account, for Component if: (i) the Bank, at any time, is not satisfied that evidence and
supporting documentation required as specified above and in the POM; or (ii) the Borrower shall
have failed to furnish to the Bank, within the period of time specified, any of the audit reports
required to be furnished to the Bank.
18. If the Bank determines at any time that any payment out of the Designated Account
was made for an expenditure, which is not an Eligible Expenditure, or was not justified by
the evidence furnished to the Bank, the Borrower shall, promptly upon notice from the Bank,
provide such additional evidence as the Bank may request, or deposit into the Designated
Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of
such payment. Unless the Bank shall otherwise agree, no further deposit by the Bank into the
Designated Account shall be made until the Borrower has provided such evidence or made such
deposit or refund, as the case may be. Refunds to the Bank made shall be credited to the Loan
Account for subsequent withdrawal or for cancellation in accordance with the provisions of the
Loan Agreement.
19. The control environment within the NBS is considered acceptable, based on the
World Bank's assessment of the NBS and Treasury from 2011. This also reflects
consideration of the latest IMF Safeguards Assessment of the NBS from 2011. Any changes in
the control and operating environment within the NBS will be monitored. The annual financial
statements of the NBS for the year 2012 were audited by private audit firm (Deloitte, Serbia),
and the auditors issued a clean/unmodified opinion on the financial statements identifying no
issues. The audit opinion on 2011 financial statements was also clean.
39
﻿Chart 1. Flow of Funds - Component 1
1. Withdrawal application/achieved DLIs
-------------------------------------------- World Bank
2. Funds transfer
The Designated Account in
EUR at the NBS administered
DIA by DIA
3. Financing of 4. Documenting
DIF within 7 financing of the DIF
days within 30 days after
I F receiving the funds
Deposit Insurance Fund's
foreign currency account in
NBS
Key:
Flow of funds Flow of documents
Component 2: Strengthen the institutional capacity of the DIA (EUR .71 million)
20. This component will include technical assistance to the DIA, primarily for consulting
services aimed at assisting in achieving DLIs for component 1.
21. Funds Flow and Disbursement Arrangements. The designated account for Component
2 to which the funds will be withdrawn to/paid from will be opened in the NBS. It will be a
foreign currency (EUR) account from which the funds from the World Bank will be withdrawn
and will be used only for the purpose of inflows and outflows under this project's component.
From that account, funds needed for payments in local currency will be transferred to a
corresponding RSD account opened with the same purpose. Payments in foreign currency to
contractors based abroad will be executed directly from the designated account.
22. The DIA will be administering the Designated Account. The project implementing
entity will prepare withdrawal applications for the replenishment of the Designated Account,
which will be signed by designated signatories (DIA management). Payments from the
Designated Account will be executed by the means of payment orders. After all of the
procedures with respect to the flow of documents and verifications and authorizations that are
described in the Operations Manual are applied, a payment order signed by the designated
signatories will be submitted to the bank where the Designated Account is opened for payment.
23. The Ceiling for this Designated Account is set at EUR200,000. Documentation
requirements for replenishment would follow standard Bank procedures as described in
40
﻿Disbursement Handbook. Monthly bank statements of the Designated Account, which have been
reconciled, would accompany all replenishment requests.
Chart 2. Flow of Funds - Component 2
1. Withdrawal application
World Bank
2. Disbursement
Designated Acct in EUR
at the NBS
4. Conversion of Key:
DIA funds to RSD 3. Foreign Flow of funds
currency
payments
DIA corresponding RSDFlwodcuet
account at the NBS
5. Local currency
payments
.----- ..--- ..-------- ..-------------- . Contractors/Suppliers
Invoices
Procurement
24. A capacity assessment of the procurement staff proposed to work in the project
procurement implementation was conducted during negotiations. Based on the assessment it
was determined that the risk level in procurement was minimal.
24. A POM was created according to the needs of the new project and submitted to the
Bank in draft form at negotiations. The POM included the description of the procurement
procedures that apply under World Bank Guidelines. A WB procurement specialist or
procurement accredited staff will carry out ongoing supervision under the loan. Also, s/he will
participate in implementation support missions and site visits and provide ad hoc advice and
support to the PIT, as required.
25. Selection of Consultants. Consultants will be hired by the project to support the services
reflected in the procurement plan. Consulting firms will be selected using the following selection
procedures: Quality- and Cost-Based Selection (QCBS); Quality-Based Selection (QBS);
Selection under a Fixed Budget (FBS) and Least-Cost Selection (LCS). The Selection Based on
the Consultants' Qualifications (CQS) method may be used in assignments below US$300,000
equivalent, officially declared emergencies and as such recognized by the Bank, and for standard
tasks for which the need for issuing a Request for Proposal, and preparing and evaluating
competitive proposals is not justified. With justification satisfactory to the Bank, sole source
selection can be used for hiring both firms and individual consultants as described in paragraphs
5.1-5-6 of the Consultants' Guidelines. Contracts estimated to cost US$200,000 equivalent or
more will be advertised internationally. Short lists of consultants for services estimated to cost
41
﻿less than US$300,000 equivalent per contract may be composed entirely of national consultants
in accordance with the provisions of paragraph 2.7 of the Bank's Consultant Guidelines.
26. Operating Costs. Operating costs of the PIT will be financed from the Loan proceeds
and will include all expenses necessary to ensure proper implementation of the project, including
inter-alia translation, interpretation, equipment maintenance and operations, travel costs
(transportation, lodging and per diem). Procedures will be described in the POM.
27. Procurement Plan. For each contract to be financed by the IBRD Loan, the different
procurement methods or consultant selection methods, estimated costs, prior review
requirements, and timeframe will be agreed between the Borrower and the Bank Project team in
the Procurement Plan. The Borrower has developed a preliminary procurement plan for Project
implementation that was approved during negotiations. Upon the Project's approval, the
procurement plan will be made available in the Project's database and on the Bank's external
website. The procurement plan will be updated annually in agreement with the Bank project
team or as required to reflect the actual Project implementation needs and improvements in
institutional capacity.
28. All direct contracts and the shopping contract for all consultancies with firms
estimated to cost US$200,000 equivalent or more will be subject to Bank's prior review by
the Bank. All sole source consultants' contracts and the first contract for each selection method
will also be subject to prior review regardless of the amount. Changes in the prior review
thresholds can be revised during project mid-term review.
29. Frequency of Procurement Supervision. Procurement supervision will be on-going
through the review of procurement documents and day-to-day contact with the PIT. Supervision
missions, which will include post-reviews and contract administration reviews, will be conducted
on a regular basis but at least once a year, depending on the success of the project, number of
post-review contracts and other factors. At least 20 percent of the post-review contracts must be
reviewed. A country office-based procurement specialist will carry out supervision under the
IBRD loan and participate in implementation support missions, site visits, and provide ad hoc
advice and support to the procurement staff at PIT, as required.
Environmental and Social (including safeguards)
30. Project components 1 and 2 do not trigger any World Bank environment or social
safeguards policies. Therefore, the Project has been assigned a Category 'C' in accordance with
the World Bank safeguard policy OP/BP/GP 4.01.
Monitoring & Evaluation
31. Annex 1 lists the main outcome indicators for the project and the principal results,
and Annex 2 (Table 9) lists the DLIs. These will serve as the basis for results monitoring and
evaluation. The DIA will be responsible for collecting the data required for monitoring and
evaluation and for verification of the DLI's based on clearly defined protocols. Indicators will be
measured against agreed targets and compared to defined baselines. Project progress reports will
be prepared by the DIA on a quarterly basis and submitted to the Bank review.
42
﻿32. For each of the DLIs a comprehensive protocol for verifying the DLIs has been
developed and listed in table 10. These will partially serve as the basis for disbursements in
Component 1. Considering the small number of impactful DLIs that assist in achieving the PDO,
the World Bank will work closely with the implementing agency (the DIA) to ensure that there
are sufficient early warning indicators to ensure compliance with the DLIs. In addition, as part of
Component 2, the Board advisor that is chosen will have responsibility for assisting the DIA with
ensuring that the DLIs are met and reporting to the World Bank any issues that may arise.
Finally, having the DIA serve as the implementing agency will also strengthen the verification
process of the DLIs, as the DIA is the responsible entity for meeting most of the DLIs (all of
them except for the DLIs related to State-Owned Banks, where the MoF will be responsible for
meeting the DLIs).
Role of Partners
33. The government's financial sector reform program to address the vulnerabilities
related to the framework for problematic banks includes the World Bank, the IMF,
USAID, and the EC. Each of the external stakeholders has agreed to a specific technical and
financing role related to the three areas above including:
1. Financing the Deposit Insurance Fund and strengthening the institutional capacity of the
Deposit Insurance Agency: The government has requested a World Bank loan to
strengthen the financial and institutional capacity of the Deposit Insurance Agency.
2. Improving early intervention, particularly for state-owned banks: The World Bank
(through this operation and technical assistance) is supporting the government's efforts to
improve its oversight of state-owned banks.
3. Improving NBS supervision and enforcement: The IMF conducted a technical assistance
mission in early September 2013 to review NBS supervision and enforcement.
In addition, the EC and USAID are providing assistance on drafting any legal changes that are
needed to implement the overall reform program.
34. The government has established a task force to ensure close coordination between
the external providers of financial and technical support. This task force will continue during
the implementation of the World Bank project and will be critical to the overall success of the
project as the sustainability of the Deposit Insurance System will depend on the overall reform
program.
43
﻿Table 10: Verification Protocols for Disbursement Linked Indicators
DLI Summary of Verification Protocol
DLI 1: Premiums DIF bank statement indicating amount of deposit from individual banks per quarter. A statement from the DIA
confirming the amount of insured deposits and listing the amount that equals 0.15 percent of insured deposits. Written
confirmation from the head of the DIA confirming the amount collected and that it is equal to 0.15 percent of insured
deposits based on the previous quarter.
DLI 2: Back-up Submission to the World Bank of the gazette that includes the adopted budget with a line item that identifies back-up
funding funding of at least EUR200 million for 2014 or EUR 50 million for 2015 and the possible uses of the back-up funding
that includes financial stability. Confirmation from the Ministry of Finance that this reflects the official budget of the
Republic of Serbia for 2014.
DLI 3: Governance Submission of proof of at appointments to the Board of the DIA based on the appointment published in official
gazette and CV of appointee consistent with the agreed to independent criteria. Independence criteria would be
defined to (1) exclude individuals who: (i) primarily derive their income directly from the government; (ii) work for
the NBS, (iii) work for agencies funded by the Republic of Serbia; (iii) work for public enterprises; (iv) work for a
bank that operates in Serbia, or are members of the board of such banks; and (2) not to exclude individuals who carry
out academic or research functions (in any capacity) for research institutions or universities owned or funded by the
Republic of Serbia. Additionally, the independent board members should have the minimum following qualifications:
at least eight years of prior relevant experience in the financial sector, finance, law or auditing within a private
company, or academia and research institutes (including those that are publically funded). Written confirmation from
the Ministry of Finance and the NBS that both provided approval of each the independent board members appointed.
Written confirmation from the Managing Director of the DIA that the Board consists of primarily independent
directors and does not include sitting Ministers.
DLI 4: Information Written confirmation from the NBS with the dates of the financial stability committee meeting that prove that the
Sharing between meetings were held since January 1, 2014.Written confirmation from the NBS with the information shared with the
Financial Safety Net DIA that includes at least the data outlined, including the dates on which the information was shared.
Providers
DLI 5: Recoveries Written confirmation from the bank that holds the deposit on the amount deposited for individual banks that are in
bankruptcy that total from February 1, 2014. Confirmation to include deposit amount from the bank in which the
deposits are held and letter from the head of the DIA detailing the assets recovered totaling that amount. Letter from
the NBS confirming that the banks in which the recovered amounts are held are designated as systemic banks based
on the legal framework of the Republic of Serbia.
DLI 6: Early detection Written confirmation from the MoF that audits were completed utilizing TORs that are acceptable to the World Bank
and timely by external auditors licensed in Serbia for all banks with at least 20 percent state ownership and that are not in the
intervention and privatization process that includes the dates on which the audits were completed and the audit firm that conducted the
resolution (of state- audit. Written confirmation from the MoF of the submission of requisite data for all banks with at least 20 percent
owned banks) state ownership as of the date of submission, and which includes the date that it was received.
44
﻿ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)
REPUBLIC OF SERBIA: Deposit Insurance Strengthening Project
Stakeholder Risk Rating Moderate
Risk Description: Risk Management:
The banks that operate in Serbia are critical stakeholders, The DIA has already mitigated against this risk by conducting the appropriate outreach with the
and they could resist the premium increase that is proposed banks and has presented the overall strategy for strengthening the DIA and financing the DIF
as part of the project. Resp: Client Status: Completed Stage: Preparation Recurrent: Due Date: Frequency:
Capacity Rating Low
Risk Description: Risk Management:
The Deposit Insurance Agency will serve as the Project The project includes DLIs that will improve the ability of the DIA to meet its mandate, and which
Implementing Entity. The staff that are needed as part of will also strengthen the DIA's ability to serve as the implementing agency. The World Bank
the Project Implementing Entity worked on another World supervision missions will also work closely with the PIT to maintain its capacity to implement the
Bank project and thus have experience with the World project.
Bank's rules and procedure.
Resp: Both Status: Not Yet Due Stage: Implementation Recurrent: Due Date: Frequency:
Governance Rating Moderate
Risk Description: Risk Management:
The governance of the DIA is sufficient to implement the The independence of the DIA Managing Board is being strengthened by the project.
project. Resp: Client Status: Not Yet Due Stage: Implementation Recurrent: Due Date: Frequency:
Risk Management:
As an additional safeguard to mitigate project risks, the loan agreement allows for the project to be
suspended if the legislation related to the DIA and DIF has been amended, suspended, abrogated,
repealed or waived so as to affect materially and adversely the DIA's ability to perform any of its
obligations under the project agreement carry out its deposit insurance and bank resolution
obligations. The project audit will also verify that any of the World Bank's financing that was
utilized was used in line with the legal framework for deposit insurance and bank resolution.
Resp: Client Status: Not Yet Due Stage: Implementation Recurrent: Due Date: Frequency:
45
﻿Design Rating Low
Risk Description: Risk Management:
The design of the project is a standard Results -Based The risks related to not achieving the PDO are mitigated by the results based design of the project.
IPF that has been utilized a number of times Resp: Status: Stage: Recurrent: Due Date: Frequency:
successfully.
Social and Environmental Rating Low
Risk Description:
The project is not expected to have any social or Rsk Management:
environmental impact. Resp: Status: Stage: Recurrent: Due Date: Frequency:
Program and Donor Rating Substantial
Risk Description: Risk Management:
The World Bank lending operation is part of an The World Bank is closely working with the government on the overall reform program as well as the
overall government financial sector reform program other donors that are supporting this effort.
and the sustainability of the project partially depends Resp: Both Status: In Progress Stage: Both Recurrent: Due Date: Frequency:
on the successful implementation of the overall
reform program.
Delivery Monitoring and Sustainability Rating Low
Risk Description: Risk Management:
The delivery monitoring is relatively simple as most The World Bank will closely monitor the achievement of the DLIs and as part of the TA component an
of the DLIs relate to areas that are under the direct advisor to the Board will be, amongst other things, responsible for monitoring the DLIs.
control of the implementing agency for the project.
Resp: Client Status: Not Yet Due Stage: Implementation Recurrent: Due Date: Frequency:
However, as a Results Based IPF, a significant effort
will still be needed by the Bank team to monitor the
achievement of the DLIs.
46
﻿Sector Risk Rating Substantial
Risk Description: Risk Management:
There are some vulnerabilities in the Serbian financial system. Non- The one small part of the banking system with possible risk is being targeted by the
performing loans (NPLs) in Serbia are among the highest in the region at about DLIs related to early detection and timely intervention. In addition, the govemment is
20 percent. Although they appear to be well provisioned, a deterioration in developing its strategy for the state-owned banking sector to minimize any risks going
economic conditions could lead to a further decrease in asset quality. In forward. The World Bank is also working closely with the task force that is reviewing
addition, three small banks in which the state had an ownership stake the overall legal and regulatory framework for problematic banks. The
(Agrobanka, RBV, and PBB) failed in 2012 and 2013 due primarily to recommendations from this task force should result in a broader financial sector reform
govemance weaknesses that led to a significant deterioration in asset quality. program.
These bank failures have raised concems about the asset quality in some of the Resp: Both Status: In Progress Stage: Both Recurrent: Due Date: Frequency:
remaining state-owned banks. However, the state-owned banking sector is a
relatively minor part of the financial system and outside of two banks that have
investments from the IFC and EBRD and are in the privatization process,
comprises less than 4 percent of total banking sector assets. Finally, the recent
bank failures have resulted in the depletion of the Deposit Insurance Fund
(DIF), which poses risks to public confidence in the banking system and
stability if there is another bank failure in the future.
Overall Implementation Risk: Rating Substantial
The overall implementation risk is considered substantial. The major risks relate to the current fiscal situation in Serbia and potential vulnerabilities in small pockets of
the financial sector. In addition, although there is a comprehensive fiscal reform program that is being planned, there are risks related to this reform program losing
momentum due primarily to possible political uncertainty. The World Bank lending operation is also part of an overall government financial sector reform program and
the sustainability of the project partially depends on the successful implementation of the overall reform program.
However, the risks related to the design of the project, the delivery monitoring and risks related to the implementing agency are low. The achievement of the PDO is
dependent on DLIs being met. Considering that disbursements are contingent on achieving the DLIs (and thus the PDO), the design of the project is considered to be
low risk. In addition, the technical assistance being provided in Component 2 further decreases the risk that the DLIs (and thus the PDO) are not met. The delivery
monitoring risk is also low as there are a small number of DLIs that will need to be monitored and the monitoring is being done by the same agency that is responsible
for achievement of the majority of the DLIs. The DIA, as the project implementing entity, also has experience with World Bank lending operations that span almost a
decade and has the capacity and the experience to implement the project.
As an additional safeguard to mitigate project risks, the loan agreement allows for the project to be suspended if the legislation related to the DIA and DIF has been
amended, suspended, abrogated, repealed or waived so as to affect materially and adversely the DIA's ability to perform any of its obligations under the project
agreement and carry out its deposit insurance and bank resolution obligations. In addition, the audit will be extended to include verification of the DLIs and also will
ensure that any of the World Bank financing in the DIF that is utilized is independently audited to ensure that it was used only for deposit insurance and bank resolution
functions.
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﻿ANNEX 5: IMPLEMENTATION SUPPORT PLAN
REPUBLIC OF SERBIA: Deposit Insurance Strengthening Project
A. Strategy and Approach for Implementation Support
1. The Bank's Implementation Support (IS) strategy lays out the activities that the
Bank team will implement, as well as the project design and monitoring features that it will
adopt, in order to mitigate the most significant risks identified in the ORAF. These risks
relate to: (i) the sector risk, in particular related to state-owned banks; and (ii) and the program
risk related to the World Bank lending operation being part of an overall government financial
sector reform program and the sustainability of the project partially depending on the successful
implementation of the overall reform program. The IS strategy relies on project design features
and technical assistance as enabling tools for risk mitigation. The IS for mitigating the two key
risks is addressed below.
* The sector risk, in particular related to state-owned banks. Even though overall banking
system is stable, there are uncertainties related to the state-owned banks. These
weaknesses are addressed through a DLI that improves the monitoring of state-owned
banks. The DLI related to targeting improvements in overall information sharing will also
contribute to proper early identification of problems in the overall banking sector. In
addition to this, the project includes a significant TA component that supports the
achievement of these two DLIs.
* The program risks related to the linkages of the World Bank operation with the overall
government financial sector reform program. The World Bank lending operation is part
of an overall government financial sector reform program and the sustainability of the
project partially depends on the successful implementation of the overall reform program.
In order to mitigate this risk, the implementation support strategy will focus on working
closely with the government on the overall reform program as well as the other donors
that are supporting this effort.
B. Implementation Support Plan
2. During project implementation, the Bank's financial management supervision of
Component 1 will be conducted through (i) verification of financing of the DIF after each
advance, and (ii) review of annual audits of the designated account. Any changes in the control
and operating environment within the NBS will be monitored and the NBS audit reports will be
reviewed.
3. For the project's Component 2, the supervision will take a traditional approach and
will be conducted in two main ways: (i) review the project's interim un-audited financial
reports for each calendar semester, the audited project financial statements and auditor's
management letter, as well as the DIA's entity financial statements audit; (ii) perform on-site
supervision with the frequency based on the assessed project's risk and performance (first
supervision in 12 months' time after the assessment); and (iii) review the project's financial
management and disbursement arrangements to ensure compliance with the World Bank's
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﻿minimum requirements. The on-site supervision will include the review of the following areas of
the project's financial management: accounting and reporting, internal control procedures and
external audits, planning and budgeting, funds flow and staffing arrangements. The review will
include all types of payments, namely operating cost, acquisition of goods and services. A
sample transactions review will also be conducted. Implementation support and supervision will
be performed by the Bank accredited Financial Management Specialist.
4. The Bank will support project implementation using its own staff as well as
international consultants. The Bank team supporting the project will be sourced from Bank
offices in Washington DC, Serbia and other countries in ECA. In addition, the Bank team will
provide support to the DIA as required. The number of staff weeks envisioned for the first year is
38, with an additional 36 for the following year.
Task Team Skills Mix Require ents for Implementation Support
Time Focus Skills Needed Resource
Team Leadership Project management 10 staff weeks (SW)
First 12 Financial Management (FM) training FM Specialist 2 SW
months Day to day coordination Operations Officer 14 SW
Operational Support Program Assistant 4 SW
Procurement Support Procurement Specialist 2 SW
Intemational consultant Deposit Insurance Expert 4 SW
Team Leadership Project management 10 SW
Financial Management (FM) training FM Specialist 2 SW
12 - 24 Day to day coordination Operations Officer 12 SW
months Operational Support Program Assistant 4 SW
Procurement Support Procurement Specialist 4 SW
rIntemational consultant Deposit Insurance Expert 4 SW
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